Get the mortgage of your choice
2020 may have lowered the morale of many homebuyers due to unexpected job losses, stagnant or lower incomes, and the need to “save more” becoming a top priority. But as they say, a crisis is a terrible opportunity to be wasted. With lower travel and entertainment spending, it was also a year of greater savings for many.
When it comes to home loans, consumers are increasingly looking for providers who can allow more flexibility and accessibility in repayments. Here are six things to think about when considering a home loan:
Rent Vs Buy
The pandemic has made people want financial security much more. They spend prudently and want to use their money wisely. Living in a house they own, rather than paying rent at a time when jobs are not quite stable, has made consumers think about building their permanent assets. With working from home becoming an almost permanent setting in the future, buying a first home or a larger one has become a priority for most consumers. Today’s lowest mortgage interest rates and lucrative real estate deals on the market encourage consumers to buy homes rather than paying rent.
Rents are typically charged at 2-3 percent of the property’s value while mortgage rates are around 7 percent. Until 2-3 years ago, this gap was over 6%. In purely mathematical terms, even today, it is better to rent an apartment than to buy if the property appreciates less than 5% per year on average. However, if rooting is a priority and the apartment’s resale value isn’t the most important criteria, this is the best time to buy for over two decades. The gradual decline in house prices, rising incomes (slow and gradual) and the lowest interest rates India has ever seen make this a great time to buy. Given the plethora of real estate choices at various price points currently available to Indian consumers, the coming years will see strong growth in the housing finance industry led by end consumers.
Is your lender bankable?
When taking out a home loan, consumers typically enter into a multi-decade relationship with the lender. Therefore, it is very important to choose a partner who has a solid foundation, built on years of indisputable brand reputation and extensive experience. Lower interest rates shouldn’t be the only criteria for choosing a lender, as they are variable rates that can gradually rise or fall over time. Since these are loans of 15 to 20 years on average, a financially strong actor with a reputation for trust will help ensure that these vary relatively less over the life of the loan.
There have been cases where borrowers have seen their rates increase by 200-300 basis points due to the lender’s revaluation, which has had to pass higher borrowing costs on to its customers. Therefore, lending firms are also experiencing a fair amount of consolidation where consumers place particular emphasis on transactions with financially strong trusted entities. Therefore, when buying a house, you should not only evaluate the options of reputable developers, but also lenders.
Affordability is a big part of the decision-making process
Consider the following points to assess whether you can comfortably afford
Can you manage to pay the down payment for the house immediately? If not, does your lender offer the option of paying it off in installments over a given period?
The interest rate will be important in calculating the monthly payments and whether you will be able to afford them comfortably without having to dip into your savings or cut some of your routine monthly expenses.
Some lenders have a maximum term of 25 years while others go up to 30 years. The longer the term, the lower the monthly payment cycle. If you are a 25 or 30 year old borrower, you may want to consider a longer term loan that reduces EMI and makes your purchase more affordable. The total cost of ownership increases with the length of the loan, but this is a tradeoff that requires special attention.
For consumers looking to buy a home to live in for a substantial period of time, check to see if there is an option to start repayment with lower EMIs and gradually increase the amount over the life of the loan. This allows you to buy a home large enough for tomorrow’s needs while keeping current affordability in mind.
In the case of a subsidy program offered by the bank, the total cost of housing increases in exchange for relief from non-payment of EMIs until ownership. While no IMEs contribute to the initial affordability, do you want to repay a larger amount in the long run? Finding the right balance between overall cost of ownership and monthly outings is essential.
Do you have flexibility in repaying the loan?
Very often, buyers depend on the sale of an existing property to buy or upgrade to their dream home. When choosing a lender, see if there is flexibility in setting up their payment plan to accommodate this. In other words, can you increase or decrease your own contribution depending on when a major event like a sale of existing property occurs? This becomes especially important when you cannot be sure how long it will take to sell the existing property, so having adequate flexibility built in is very valuable.
Additionally, when discretionary spending is higher, look for options to plan ahead for a break in your IME, allowing repayment flexibility without compromising your creditworthiness.
Choose a good insurance plan
Getting adequate insurance (both life and health) is always essential, but even more so when you are in debt. Some things to consider when choosing insurance coverage for a home loan:
Are you getting enough coverage that the loan doesn’t become such a heavy burden that if something were to happen to the main maintainer of the house, the house would have to be liquidated? Keep in mind that the current amount of life insurance you hold predated the decision to take on more debt. Since the existing coverage is aimed at ensuring the continuity of the lifestyle, it would be good practice to obtain as much coverage as the new loan amount so that the two are mutually exclusive.
How much do you have to pay to get this coverage? What are the best options available on the market to keep you and your family more secure and at peace?
Service after disbursement
Your interactions with the lender are not limited to the first disbursements or repayments. It is a long journey which warrants strong support and constant communication between the lender and the consumer. Choosing a mortgage lender solely on the basis of existing programs or prices may not be the right thing. Much has changed over the past few years and the reviews and experiences of recent home loan buyers will present a more accurate assessment of the lender’s post-disbursement services.
Often, loans are taken out to purchase homes under construction – where disbursements must be made in installments as construction progresses. Consider how technologically advanced the lender is, and how closely the developer and lender are coordinated so that construction-related payments are not cumbersome. Often times a buyer is responsible for coordinating the two and having been both a buyer and a borrower myself, I can assure you that this is a time consuming process – something that many existing players can improve upon.
How easy is it to get self-help from your lender’s digital ecosystem – anytime you need a loan statement, check your delinquency, request a top-up? And, more importantly, is the user interface easy to use and fast?
These are the most important points that come to mind when obtaining a home loan. In short, are you being served what is most important to you?
The author is the CEO of Godrej Housing Finance
DISCLAIMER: The opinions expressed are those of the authors and Outlook Money does not necessarily endorse them. Outlook Money will not be liable for any damages caused to any person / organization directly or indirectly.