It is a key aspect when going in for a loan to make the most of income, debt and savings and keep it well-balanced
Everyone wants to own a beautiful home. Gone are the days when one used to religiously save and build a corpus over a lifetime to have that home. Today, you have a number of banks and NBFCs who can help you fulfill your dream.
“These institutions can fund utmost 80 per cent of the property value with a prerequisite that EMIs should be maximum 60 per cent of the income. But, if you are pledging more than 50 per cent of your salary to fund a loan for next 20 years, when will you start saving for your children’s education, travel and retirement?” says Pallav Saraswat, managing partner, Dhanmantra Investment Solutions LLP.
To avoid any such financial suffocation, a smart move by the buyer would be to focus on credit optimization. It is a key aspect when going in for a loan to make the most of income, debt and savings and keep it well-balanced, say experts.
Some of the key aspects to be kept in mind include:
- Your risk appetite: “The efficiency of this parameter is reflected in the long-term average returns of the different asset classes,” says Saraswat.
For equity investments, long-term returns are at an average of 15 per cent which is much higher than current home loan rates of around 9.55 per cent. Hence, investors in property with higher risk profile should retain their investments for long-term returns and opt for higher loan value.On the other hand, risk-free assets like debt funds and bank fixed deposits give an average return of 8 per cent which is lower than the interest rates on the home loans. Hence, to reduce the cost of funding, a conservative investor should opt for minimum loan amount possible and try to self-fund it as much as possible, says Saraswat. This way, an aggressive investor in property can allow his/her corpus to grow over a period of time and can pre-pay the loan easily while a conservative investor, by opting for lowest possible loan amount, has to pay less to the lender.
- Debt (EMI)-to-income ratio: An ideal value for this ratio is 35-40 per cent, while rest of the income should be deployed carefully in savings and necessary expenses, Saraswat adds.
- Savings-to-income ratio: Considering the EMIs, if you are able to save 15-20 per cent of your income in a disciplined way, you will be able to support yourself adequately in achieving your other financial goals as well.Thus, it is essential that a careful consideration of the above parameters be made so that one not only ensures in reducing the `cost’ of the home loan but also be able to ensure proper allocation of your income to all the other important areas of the family.