Are you Financially Ready for Home Loan ? Unfortunalety no one pose this question to potential Home Loan Borrower. Infact, it is in the best interest of a borrower to ask himself whether i am financially ready for Home Loan or not. Financial Planning before availing Home Loan is imp task to avoid any future shocks. Home Loan is a huge financial committment (read: Financial Burden). If Home Loan financial readiness is not planned well in advance then it can lead into another financial mess. Based on my experience, i can say that biggest impact of Home Loan is on the family of a borrower. In most of the cases, family is not ready for home loan mentally, financially and emotionally. Lets go through imp checklist to be ready for Home Loan
Lifestyle Change
Lifestyle changes with increase in income level and it is very very difficult to downgrade from existing lifestyle. Home Loan EMI is 40%-50% of Net Take Salary. It is as good as cut in salary therefore it’s a financial shock for many families as they need to re-adjust the existing life style. The borrower is metally prepared but the family does not foresee lifestyle changes. In short, to be ready for home loan family support is must. The best way to avoid this rude shock after home loan is to plan well. For 3 months, try to manage houselhold expenses with 50%-60% net take home salary. Though it is not easy task but if you and your family can manage then it means you are ready for Home Loan
Contribution of a Buyer
The 2nd major financial planning blunder. Assuming i am buying a property worth Rs 100. As a borrower i am only eligible for Home Loan of Rs 80. If i am availing Home Loan from a bank then i need to arrange Rs 7 towards stamp duty and registration charges (vary from state to state) and Rs 20 towards my contribution in property deal. As per RBI guidelines, Stamp Duty and Registration Charges are not included for LTV or Home Loan calculation. Bank will approve 80% of Sale value i.e. Rs 80 as Home Loan. Whereas HFC’s can approve 80% of Rs 107 i.e. Rs 85.6. In short, as a borrower i need to arrange Rs 27 from my own pocket if i am availing Home Loan from banks and Rs 21.4 if the Home Loan is from HFC. Most of the borrowers struggle to arrange own contribution thus are not ready for Home Loan financially.
EMI Contingency Fund
I always suggest my readers to mainatain contingency fund equivalent to 3 months household expense. Besides this, it is absolutely necessary to maintain seperate EMI contingency fund of 3 months. It will help to pay EMI in case of any unexpected increase in household expenses or eventuality. EMI contingency fund is critical checklist line item of “I am ready for Home Loan”. This fund should be set up before availing Home Loan.
Term Insurance
Now a days all Home Loan lenders insist to insure Home Loan through costly Home Loan Protection Plan (HLPP). I wrote a post 7 Reasons Why You Should Not Buy Home Loan Protection Plan but at the same time it is critical to insure Home Loan. Life is uncertain and in case of any unfortunate event the familiy of a borrower should not suffer. Answer to address life uncertainity is much cheaper and best alternative of HLPP i.e. Term Insurance. If i am planning to avail Home Loan of 1 Cr then it is advisable to avail online term insurance of 1 Cr before applying for Home Loan. Term insurance is imp ladder to climb to be ready for Home Loan financially. In my opinion, following are the best online term insurance plans
1. HDFC Life Click2Protect
2. SBI Life eShield
3. Max Life – Online Term Plan (Basic Life Cover)
* Disclaimer: I have subscribed to all these 3 plans. I selected these 3 plans after exhaustive research and found them very good. This suggestion is purely based on my personal experience and research & is not binding on readers.
Health Insurance
As per recent studies, Medical inflation in India is one of the highest in the world which means cost of good medical care is increasing at fast pace. Reason for high cost is lack of good medicare facilities i.e. supply is less and demand is more. In current scenario, we are more prone to lifestyle diseases thus need medical attention at early age. I have undergone knive 2 times and i know the cost associated with even a minor procedure. Thanks to my health insurance policy. Any medical emergency can upset your personal finance calulations for long period. Prime objective of Health Insurance is not to impact Home Loan EMI payment due to any medical emergencies. Health Insurance ensure that you are immune from any such shocks. Health Insurance is must along with Term Insurance before i say that yes i am ready for Home Loan.
I tried to cover all critical points which are very crucial from personal finance perepsective to be ready for Home Loan. When you buy your dream home it should be pleasant and once in a lifetime experience rather a nightmare. It is important to be ready for home loan financially, emotionally and mentally so that you can enjoy a cup of tea in you balcony without any worries.
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Well said sir,
Can you highlight the tax benefits on term policies.
Thanks
Thanks for liking the post. You can avail tax benefit u/s 80C of Income Tax Act for premium paid towards. The limit for section 80C is revised from 1 lakh to 1.5 lakh in this years budget
Life cover should be atleast 10 times of your annual income and it is advisable to divide this coverage in 2-3 policies.
Sir,
your articles are very informative. Thanks for writing such articles. In this context I would very much appreciate if you please write regarding best medi claim providers. Also just for investment purpose will you suggest to apply for 1BHK of DDA housing schemes.
Thanks for your inputs. I definitely write a post on medi claim providers.
In my personal opinion, DDA housing scheme is not beneficial for investment purpose. If you wish to stay then you may apply.
Sir we and many others are still eagerly waiting for you write up on mediclaim policies. :)
I will definitely write. Apologies for delay. My research is still not completed.
HI Nitin Sir
I have a Term Insurance(1600000 for 20years) linked with my Home Loan of LICHFL. Can you please let me know if I transfer my Home Loan from LICHFL to any other bank, will the Insurance Plan remains valid or be lapsed.
Thanks in Advance
Regards
Your insurance will lapse if you transfer Home Loan.
All financial questions are being answered in one place @ your website. And all we readers are thankful to your articles.
As well request you to please suggest me how to avoid the loss which happens for the Policy laspe while transferring the Homeloan from LICHFL to another bank. As LICHFL has two years fixed and floating later and there would be no option provided by LICHFL for convertion of interest, the only option is to transfer the Loan to another Bank.
Builder had a tie up with LICHFL, hence I have taken Loan from it thinking that the process goes smoothly. But, now I am facing lots of challenges with ECS debits and waiving off the penalties and addtl. interests. these penalties are being waived off as the mistake is with LICHFL. However I have to have lots of communication with team.
All these challenges are making to take steps towards Loan transfer. The Loan tenure even did not complete 6 months.
Regards
I suggest you to continue your Home Loan till end of fixed interest period and then you may transfer to minimize losses. Also check your insurance policy whether it is single premium policy and also check any other clause related to surrendering of insurance policy.
Hi Nitinji
I have checked with Insurer regarding the Policy lapse, I have got a positive reply from UIIC. I am just psting the same for you and other readr’s reference.
“Your Policy shall continue to remain in force. On shifting the loan account from LICHFL to any other Bank, please provide (1) loan closure advice from LICHFL (to be addressed to United India) (2) Confirmation from the concerned Bank to which you are shifting to that the property stands mortgaged with them (to be addressed to United India). On having these, necessary endorsement for incorporating the name of the Bank shall be effected.”
Thanks for the suggestion.
Regards
Thats great…All the best for Home Loan Transfer.
Dear Nitinji,
I am planning to purchase a flat in Pune.
The builder is asking me to give infrastructure charges (Electricity + Parking) in cash and not to show it on agreement.
Though my loan eligibility is reduced due to this, I am still getting a better deal as I am saving nearly 30000/- on stamp duty + Registration.
The bank person has told me it’s up to me to decide and it will solely improve my eligibility limit.
I just want to know, by doing so, will I be in any trouble in future ? What is the advantage of including infra. charges in agreement ?
In any case, parking is provided to all flats in the scheme. So, is it necessary to include these charges separately? Or, just a mention of the parking size is enough?
Thanks.
I will not suggest any cash transaction in property deal. All components should be included in agreement.
As per ruling of Supreme Court of India, builder cannot sell car parking therefore these charges will not be mentioned in agreement but builders mention car parking charges under some other cost head of agreement and issue car parking allotment letter.