What is the best age to go for a Home Loan?

01 Nov 2019

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Buying a home is a dream for every individual across the globe. The only problem is affordability. Buying a house needs to fit the budget. One’s dream need to be realistic in order to achieve it.

From a lender’s point of view a person becomes eligible for loan if he is earning a sufficient income from a legitimate source. He has to have a steady source of income and enough saving after taking care of the regular expenses and other loans as he has, to repay the equated monthly installments (EMI) of the home loan. These factors are known as creditworthiness of the borrower and credit behavior of a borrower is assessed in India by what is known as CIBIL score.

The CIBIL score takes into account the credit history of the person, whether he had defaulted on his loans earlier and similar other points.

Another point that comes up is age which decides the tenure of the loan that is relevant for purchasing a property.

Age in isolation is not a factor, what the lender would also like to look at is the earning and repayment capacity of the person, quality of the property he is planning to buy and the loan amount he is seeking.

Let’s take the case of a house property which is worth say Rs 75 lakh which includes all taxes and statutory charges. Assume that the lender is willing to fund 80 percent of the amount, which in our case is Rs 60 lakh.

Now, let’s consider three person aged 25, 35 and 45 who approach the lender for the loan on this property.

These days the younger generation gets a good starting salary especially if he has a good education or is a professional. In our case let’s consider an average individual.

Clearly, a 25 year old person can take the loan for the longest period possible, which in India can be around 30 years. The middle-aged person can be eligible for the loan for 20-25 years. The eldest individual will get a loan with a tenure of 10-15 years maximum. The lender would consider the useful working life of the borrower before fixing a tenure.

Lenders generally hesitate to lend a housing loan to an elder person. Part of the reason is the limited working life he has in front of him and secondly because his obligations increases with age. Children’s higher education needs to be funded, their marriage and medical cost associated with him and his spouse which can lead to cash flow mismatch going forward.

However, if the older person has a strong income stream and needs money for a shorter tenure, lenders would be interested in it. They may or may not ask for more collateral against the property since in a small tenure window price fluctuations can act as an added risk.

Or they may consider taking a higher down payment which would mean a lesser exposure and time risk for the lender.

Another way the older person can improve the chances of getting a loan is by applying for it with a co-borrower. This way the risk of the lender is reduced and there are more than one income stream to take care of the EMI payment.

There is no fixed and ideal age for taking a home loan. Finally what matters is the affordability. As a rule of thumb the EMI outgo should not exceed 30 percent of the income. Anything higher would put stress on the financials of the individual.

Financial markets in India have now matured offering an individual multiple avenues of raising money. Having said that, assets like a home is best bought as early as possible in one’s life since after this he can concentrate on wealth creation.

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What is an EMI?

A loan is always taken for a specific purpose, be it a housing loan, an automobile loan, an education loan or a personal loan. Whenever a loan is taken it has to be returned to the lender. These repayments are done in a specific format where the amount is deducted from the borrower’s account on a particular day of every month. The amount so deducted is also pre-decided and depends on various factors. This standardised deduction in financial terms is called as Equated Monthly Instalment or EMI.
The value of the EMI depends on four main factors. These are the amount borrowed, the rate of interest to be charged on the amount borrowed and tenure for which the loan is borrowed and the type of loan fixed or floating. If the loan is a floating one then there is one more component that affects the EMI which is called ‘Rest’.
All other parameters being equal higher the principal amount borrowed higher will be the EMI. Similarly, a higher interest rate would mean higher EMI, all other things being constant. If the amount borrowed and the interest rate is constant then a higher tenure would mean lower EMI and a lower tenure would mean higher EMI.
In the case of both the fixed and floating interest rate loan, in the first EMI outgo, the interest rate component is the highest and the principal is the smallest. By the time the borrower reaches the last EMI, the interest component is the smallest and the principal is the maximum.
In case of a fixed interest loan, the EMI remains the same throughout the period of the loan. While in the case of a floating interest rate loan, the borrower has the option of reducing the EMI amount periodically as per change in the interest rate or allowing the EMI to be constant and the period to reduce.
The borrower has the option of part prepaying his loan. Whenever this happens the option available to him is to either ask the lender to reduce his EMI amount from the date of repayment or to let the EMI amount remain the same but reduce the period of the loan.
In the case of a housing loan, the interest and principal that is being paid through EMI, is summed up at the end of the financial year to calculate its impact on tax benefits that the borrower can avail of.
In case a borrower defaults on any EMI the lender will impose a penalty on the non-payment or late payment that was missed/delayed..
In the case of regular - non-payment of EMIs, lenders will be taking more severe action to recover their money and the CIBIL score of the borrower is adversely effected, resulting in adverse effect on credibility of borrower for future loans.
The good part about EMI is that the borrower knows exactly the amount that will be going out from his bank account and on which date it will be deducted. The lender also benefits knowing the cash flow that will be coming into his account every month.

Why is a CIBIL Score Important?

Started in 2000, CIBIL or the Credit Bureau is an authorized credit information company that tracks debt repayment history and provides a credit score accepted by a vast network of financial institutions as a valid benchmark to examine a potential borrower’s credit quality. Here’s why a CIBIL score is important:
Lender considers the CIBIL score before approving a loan
The information collected and maintained by the bureau is gleaned from data collected from banks and other lending institutions on a monthly basis. On the basis of this data, CIBIL issues a score. This score is shared with the lenders on request, when an applicant applies for a loan.
What is an ideal credit score?
The range is from 300 to 900. Any score higher than 750 is a decent credit score. If an applicant has a credit score higher than 750, he/she is likely to get the loan approved and may get an attractive rate of interest. A loan application may be rejected if the credit score comes out to be too low.
How to source your CIBIL report?
Apart from a CIBIL score, you can also get your CIBIL credit information report. The report details the credit quality of your auto loan, home loan, credit card, over draft facility and personal loans. It carries your personal details, employment details and account information. The procedure to source your CIBIL report is exactly the same as getting your CIBIL Score.
Components of the CIBIL report
CIBIL Score
The first part of your CIBIL report has your CIBIL score, which is a value between 300 and 900. A score closer to green that is above 750 is preferable.
Personal information
Another section contains your personal information like name, date of birth, PAN number, Passport details and gender.
Contact information
The contact Information segment will capture all your address and contact details.
Employment information
The employment section will provide details about customer’s income and occupation at the time of a previous loan sanction.
Account information
An important section of the report is the account information which details the material about the borrower’s credit cards, loans, name of the lender, type of loan (whether secured or unsecured) and all the accounts held by the borrower.
Consumer Dispute Remark
The borrower can also put in their remarks about a particular loan transaction in the Consumer Dispute Remarks for evaluators to see every time the credit report is opened for assessment. The comments are presented for a year.

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