A home loan is a long term commitment. Therefore, if you are planning to take one to purchase a house, here are a few things you must keep in mind when you take a home loan.
Focus on the Property First, and Then the Home Loan
I am quite sure you can save a lot of money by negotiating hard with the builder or the seller rather than haggling with the banks. You can probably save a portion of processing fee or save 10-15 bps on the interest rates by shopping around. However, the saving will be nowhere compared to upfront 15% discount on the property price.
Let’s consider an example. If you get 15% upfront discount, you take a loan of 51 lacs instead of Rs 60 lacs. Let’s further assume that the loan for Rs 60 lacs for 20 years is at 8% p.a. whereas the loan for Rs 51 lacs is at 9% p.a. The EMI for Rs 60 lac loan will be Rs 50,186 while the EMI will be Rs 45,886 for Rs 51 lac loan. I have not even considered the savings on down-payment.
Real estate industry is in doldrums for various reasons. Builders are stuck with unsold inventory and have been forced to give incentives to buyers. Do go through this post on many types of discounts that the builders are offering these days. However, don’t fall just for the discounts. Purchase a property that you are reasonably sure will be delivered within committed timelines. Do note that the concessions by the builder and the bank are independent. Just that you are negotiating hard with the builder/seller does not mean you can’t negotiate with the lender.
Prepare for Down-Payment Well in Advance
If you have been planning to purchase a property, don’t leave your investment planning for house till such time you stumble upon the right property. After all you wouldn’t get the loan for the entire amount. You will get the loan only for say, 75-85% of the market value of the property. In addition, there will be ancillary costs for documentation/registration etc. These have to be borne by you. So, start saving now for the down-payment and such expenses if you plan to purchase a house in the near future. You can work out the numbers to understand how much you need to invest. You may have an option to reach out to your friends or family or other funds to fund the deficit. However, that should only be your back-up plan. You can either invest in a bank fixed/recurring deposit or a liquid or ultra-short term debt mutual. I prefer the debt mutual funds due to better liquidity (lesser restrictions) and tax-efficiency (especially if your purchase horizon is uncertain).
Tax Benefits for Let-Out Property Have Changed
This is important if you already own a house and are planning to purchase another one. If you are under the impression that you will get unlimited tax benefit paid for interest paid for a let-out property under Section 24 of the Income Tax Act, you are wrong. This used to be true till FY2017. Not anymore. In Budget 2017, tax benefit from loss from Income from House Property was capped at Rs 2 lacs per financial year. This is for all the residential properties you own. Earlier, there was no such capping for let-out properties. The cap of Rs 2 lacs was only for a self-occupied property.
Income from House Property= Net Annual Value (i.e. Rental Income – Municipal Taxes) – Standard Deduction – Interest paid on Housing Loans
Clearly, the loss from income property can be much higher than Rs 2 lacs if the loan amount is big or you have multiple home loans running. Even though you are allowed to carry forward the excess loss for set-off over the next 8 years, I do not see this as much of a relief. With change in tax benefits, the returns from the purchase of a house (and subsequent sale) can also be a bit lower. You can read about this aspect in greater post here.
Be Sure of Your Cash Flows
If you are going for an under-construction property, you will have to bear both EMI and the rent for a few months or years. You must be sure that you can afford both at the same time. By the way, you also need to decide whether you want to go for Pre-EMI or Full EMI. Do note the tax benefit for home loan kicks in only once you get possession of the house. And we have discussed in a previous point, the tax benefits may be lower than you actually thought. Lower tax benefits can affect your cash flows.
Don’t Give in to the Bunkum from Bank Officials
Banks will try to sell you expensive insurance plans to earn hefty commissions for the bank and meet their sales targets. And some of these plans might be quite useless too. You can read about an utterly useless plan from ICICI Bank (ICICI Lombard actually) here. I am not saying that you do not need insurance protection. You need adequate insurance at all times. All I am saying is that you don’t need to purchase expensive Home Loan Protection Plans (HLPP) from the banks. You can take a plain vanilla term life cover (perhaps with disability riders too) and get it assigned to the bank. There is no need to purchase insurance from the bank. Do note a few bank officials will link the home loan sanction to purchase of insurance. Don’t give in. They can’t force you to purchase such plans. Ask them to give this in writing and they will relent. By the way, HLPPs may not even provide you complete loan protection. Here is a real life example where the family of the borrower suffered after demise of the borrower despite purchasing a HLPP. Yes, in your loan agreement, there might be clauses that make purchase of insurance (especially property insurance) mandatory. However, that does not mean you have to purchase insurance through the bank. You can purchase from any insurance company.
Spreadsheet Is Your Friend
Banks have also been coming out with many kinds of innovative loan products to attract borrowers. I have discussed many such products in this blog. You need to see if such products are useful to you or you will be able to make the best use of the features. And the best way to figure out your savings is through spreadsheet analysis. Such an analysis can many times (not always) look through the rhetoric behind the product and present you the true (if any) benefit of the product.