Buying your first home? All you need to know about home loans.

Continuing with my series on financial awareness, this post is all you need to be wise about when and how to apply for home loans, take advantage of the movement in interest rates, and keep your spending in check. So, shall we get you one step closer to moving into your dream home?

As I sit in my home office and look out the window, I see a couple in their late 30s, prospective home owners touring an adjoining house for sale. When I see this couple, it takes me back to our fortuitous moment one Sunday evening four years ago when we saw this house for the first time.

It was love at first sight.

But, that’s not enough to buy a house, is it? It takes tons of money, saving, and astute planning these days. I sit here reminiscing those days of meticulous planning when we were trying to sell the house we were living in then, secure a home loan for the present one, and pay the 20% down payment typically required by builders.

Today most of us are fulfilling our dream of buying a house much earlier than our parents’ did. Believe the primary reason is financing the house through loans. Our parents were relatively conservative and bought a house, that was within their means, closer to their retirement from their savings.

Fast forward to this generation: our aspiration to live larger than life size homes has encouraged us to borrow beyond our means. It’s easier to get carried away. Thanks to the due diligence done by banks before approving a loan based on one’s net income, there are limits to how much one can borrow, and rightly so.

I have structured this post as an FAQ making it easier to read. It draws on our financial wisdom over the years. Common questions that you can find elsewhere such as your loan eligibility are not addressed. Instead, trickier questions such as budgeting for interiors are dealt with in detail.

1. Are you ready to buy your first home?

It’s time for a rain check before you get into the house hunting market. Evaluate your savings if you the requisite cash to buy a house as you cannot go scrambling for funds once you like a certain house. Down payment required by builders is usually 20%. So, if the cost of the home is Rs 1 crore, you will need 20 Lakhs initially plus some more set aside for interiors and registration charges.

2. How much should you borrow?

I’m not talking about how much you are eligible to borrow here. Your take home salary determines your loan eligibility. Banks usually do not fund more than 80% of the value of a house. The loan you can take is often not more than 50% of your take home salary every month. So, for instance, if your take home is Rs.1,00,000 you will not be eligible for a loan whose monthly EMI is more than Rs.50,000 per month.

My tip: target a loan where your monthly EMI is no more than 40% your monthly take home salary. This comes from my principle that expenses take up 30%, savings 30%, and loan constitutes 40%. With time, this percentage will come down as your salary increases. This will ensure you are not depriving yourself of experiences or bare necessities.

3. How interest rates differ?

Home loan interest rates for women is generally lower than that of men. In layman terms, you will pay a lower EMI every month is the interest rate is lower. And every 0.1% matters. If the wife is earning, then she can be the primary borrower.

4. Can you take a loan to do interiors?

Typically, no. But, what you can instead do is set aside some money meant for down payment of the house towards interiors. Pay the builder from the loan as much as you can.

5. How much do interiors typically cost?

When you approach an interior designer, the first thing they will ask you is what is your budget. I had no clue. Just like you. I just knew the things I wanted to get done and let them tell me how much it was going to cost. The tricky bit here is that the same wardrobes can be done from 1,00,000 to 3,00,000 based on the hardware, material used, accessories etc.

So here’s what I’d suggest: the thumb rule is 10% of your house’s cost will go towards interiors, artifacts, moving, furniture, and appliances. On a very conservative level.

6. Can I avail a home loan for renovation or building an extra room or floor?

As newer properties are getting pricier, home renovations are all the more common now. Back in 2010, when we were hunting for a new apartment and did not find one, we decided to stay out in that apartment for a few more years as the location was great. We spent some money in renovating the house instead like newer faucets and tiles for the bathroom, appliances and hardware for the kitchen, wall cladding, and a fresh lease of paint.

You can avail a loan for home improvement and home extension projects as well.

If you are unsure about homes with what kind of a budget you should be looking at, then this post may be a good starting point “Why the price is never right to buy a home?“. If you have any more questions, feel free to leave a comment.