Top 5 mistakes to avoid when you take a home loan!

Borrowing a loan requires careful planning and analysis. When you take a home loan, this becomes all the more important, since the commitment is for a long term. You may end up paying more or getting inefficient service if you choose the wrong scheme or bank for your home loan. There are many mistakes committed by home loan borrowers, which can prove to be quite harmful for their finances.

Here are the top 5 mistakes committed while taking a home loan:

1. Not researching options well: Home Loan is an extremely popular product available with banks. Many borrowers do not take the effort to research the home loan options offered by different banks. Your base bank branch may be offering you a good deal on housing loans. However, it is always advisable to do some window shopping and understand various terms from a few banks. Evaluate not only the interest rate charged, but also other details like the other charges and fees, serviceability and if the bank has lent to other buyers by the same builder. You must also consider how long the bank takes to disburse the loan, as this can have a direct bearing on your terms with the builder. Your original home loan documents will be with the bank from where you borrow. Therefore, it is of utmost importance that you make the right choice, which is both economical as well as safe.
2. Borrowing more than you can afford: Another mistake which most people make is to borrow more than what their income levels permit. When banks determine your eligibility amount, they look at your income and existing liabilities and then grant the loan. However, they do not consider your existing expenses. If your existing expenses are high and you take a loan which results in high EMI payment, you may end up in a financial crunch. Therefore, it is always better to lower your budget if your current income and expenses levels are not favourable. Do a simple calculation of all your fixed monthly expenses (including existing EMIs, if any). Add this to the amount of EMI on your proposed home loan. If the total expenses are way too close to your monthly income levels, then it means you should settle for a less expensive property. It is recommended that all EMI commitments should be less than 40% of your monthly take home salary.
3. Choosing a wrong home loan scheme: Over the past few years, banks have come out with different schemes for home loans. One such scheme which was quite popular was the teaser loan scheme. The interest rate for the initial 1 or 2 years is fixed at a low rate of 8% or 8.5% per annum. Thereafter the loan becomes a floating one, which is linked to the bank’s base rate or prime lending rate. People opting for such schemes should do the due diligence to understand if they have the capacity to meet the EMI or tenure changes that will be introduced when the floating rates kick in, which can be significantly higher!  A lack of understanding or a lack of repaying capacity when higher interest rate kicks in can only result in difficulty in servicing the loan! In fact there are many cases when the borrower is unable to pay the loan and therefore loses ownership of the house. You must always understand all aspects of the home loan scheme you are opting for, before making the choice.
4. Not reading the home loan agreement: It is very important to read the fine print before signing the dotted line. Almost 80% of the home loan borrowers do not take the pains of reading every clause in the agreement. This can have serious repercussions if the bank official fails to mention something that maybe critical for you when discussing the terms orally. A home loan agreement can be cumbersome to read. Nevertheless, what is on paper always holds good, and therefore you must spend extra time in reading every aspect. Also, it is always advisable to clarify all doubts before you sign the agreement.

5. Not taking an insurance cover for your home loan: You purchase a house for yourself and your family. The home loan for this purpose should not be a burden on your family, in case something unfortunate happens to you during the tenure of the loan. Most borrowers do not recognize this risk. As a result, they do not take an insurance cover on the home loan. Even if you do not want to take a home loan insurance, you must atleast have a pure life cover that includes coverage for your home loan and other liabilities. This will provide monetary compensation to your family in the circumstances of your unfortunate demise, and they can use this amount to pay off the loan. It is also recommended to take a personal accident cover and critical illness cover. These insurance policies help in covering a part of the loan, in case of your temporary or permanent loss of income due to unforeseen events in your life.

This article was  first published  in Deccan Chronicle on August 18th 2014.  Read the article in print.

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