Sunday, January 15, 2012

THE RIGHT AGE FOR HOME LOAN

The right age for home loans!

A person generally buys his/her dream home only once in their lifetime. These days, most of the people buying their house, do that with the help of a home loan. However, what are the important characteristics of a home loan?
The answer to this question brings us to two very key terms: interest rates and home loan tenure. Generally, the home loan tenure isn’t given as much importance as the interest rate, or even the repayment options. However, the point of this article is to emphasize on the importance and utility of the home loan tenure, which is the need of the hour given the current rise in interest rates by banks and other lenders.
The focus of this article would be to on one of the most important yet not known aspect that helps in deciding home loan tenure: the age of the borrower.



RAMAN GUPTA 9878392666
VANITA GUPTA 8427637100
AGE CRITERIA
If you have ever wondered why banks are keen to know the age of the borrowers, it’s because of this reason. Banks have a policy that the younger the borrower, the higher is the loan tenure available for him/her.
According to the eligibility criteria decided by banks, the age of retirement is 60 years in case of a salaried individual, while it is 65 years in case of a self-employed individual. According to this, if one decides to take a loan in his 30's, the maximum loan tenure offered to him/her would be 20 years. Even though, some banks offer home loans for 25 years, but that is an exception rather than the rule.
These days, due to the inflation and the monetary tightening installed by the Reserve Bank of India, banks have been revising the interest rates charged from their customers. Before taking a home loan, one must always take into account the fact that interest rates fluctuate during the loan tenure. These fluctuations and revisions also have an impact on the home loan EMI, irrespective of the face if one takes a loan at a fixed interest rate or floating interest rate.
Taking the recent case of an interest rate hike, there are two options available. One: To increase the EMI and keep the loan tenure same and Second: to keep the EMI same and hike the loan tenure.
However, the second option is generally, not a given in most cases! Only if the loan borrower is young, can he get an extension in his loan tenure. However, the loan tenure can be hiked to a maximum of 25 years. If the loan borrower is in his 40's, the only option available in such as case would be to increase the EMI.
What can explain this? The reasoning is that by the time one is in his 40's, the rate of increase in potential income is much less as compared to what one can expect at a younger age.
Another benefit that the age of the borrower brings to a comparatively younger borrower is the increased loan eligibility. Even though the criteria depends mostly on the current income that the borrower draws, but it also considers the potential of increase in salary as a factor. So, one has an option to easily opt for a top-up loan to meet personal needs or to take care of an increased EMI. In addition, there are some repayment options available, such as Step-Up repayment facility or SURF. Under these options, the EMI is low in the initial period and it increases at a later stage. This scheme ideally suits a young borrower, who is climbing up the professional ladder.
Let's consider an example. Suppose a 30-year old individual takes a home loan of Rs. 30 lakh at an interest rate of 9 per cent for 20 years. Suppose he earns about Rs. 50, 000 per month. In 2008, the interest rate increases to 11 per cent. Since he is 30-years old, he has an option of increasing the loan tenure to the maximum limit of 25 years. However, by the time the interest rates increases, his salary also increases by 7 percent year on year and hence, has increased to Rs. 77, 140 till 2008. Hence, he can easily choose an option of either increasing the EMI or increasing the loan tenure.

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