To be or not to be a homeowner, that is the question all of us will fuss over at some point in life. If the answer is yes, up comes yet another question: when should you be a homeowner? And this question becomes even more pertinent if repaying a home loan is part of the deal.
Some of us prefer saving all our lives to build up the financial capacity essential for securing a roof over our heads. Others wade into the problem at a young age, bravely taking on the challenge of paying EMIs.
But is there a proper age for becoming a homeowner? Here, we will build the case for buying a home early in life and give you five reasons why you should not delay the decision till your fifties.
Young applicant vs. ageing applicant
If you approach a bank for a home loan request in the sunset years of your working career, don’t be surprised if the bank is not as favourable to you as it is to a young applicant who may be earning far lower.
The reason is quite evident; at the end of the day, banks need to safeguard their money, especially in the rising NPA scenario that they currently find themselves in. When a person is working, he is likely to repay his debts more efficiently than someone not working or about to retire soon and dependent on his investments or pension for sustenance. Hence, banks will prefer borrowers who can finish the loan tenures during their working life and won't be reliant on their pensions to repay their loans.
Repaying a loan after retirement
The later you opt for a home loan, the higher the likelihood that a part of your loan tenure will overlap with your retired life. This leaves you financially vulnerable in the eyes of the bank as your income may be limited and liabilities high, especially with the rising healthcare costs.
The overall risk factor for the bank increases substantially if it offers a loan to you with a tenure overlapping with your post-retirement years. This can be a good enough reason for a polite loan denial.
Priority of expenses
With advancing age, your priorities in life are likely to change remarkably. While you may be planning to have your own home today, a few years down the line, you may need money for the education or marriage of your children. Now, with limited income sources either through investments or pension, you may be hard-pressed for funds, especially when you are paying a high proportion of your monthly income as loan EMIs.
As an unwritten rule, banks are comfortable if your loan EMI is less than 40-45 per cent of your overall monthly disposable income. Anything above that is a risky proposition for both the bank and the borrower. Rising inflation, change of priorities down the line, possible interest rate hikes in future, and salary possibly not keeping pace with inflation may all add up to make your loan EMI cross the 40-45 per cent yardstick, making your loan a millstone around the neck.
Floating interest rates
If you are repaying a loan with a floating interest rate, a rise in the rates will increase your EMIs. This would put greater stress on your finances if you are servicing any part of the loan in retirement, therefore putting you at the risk of default. In such a scenario, you could opt for a fixed rate loan. This would mean that you would not be able to enjoy a fall in interest rates, but at least you will have the comfort and certainty of a fixed EMI.
A lower loan tenure
Home loans are long-term financial obligations. Loan tenures can go up to 30 years. If you take a loan after the age of 50, you are likely to get a short-tenured loan since banks are not likely to lend to senior citizens for reasons we have discussed above.
If you are past the age of 50, adding a younger co-applicant — for example, your child who is in their 20s or 30s and earning regular income — can increase your chances of getting a loan with less imposing terms and conditions. But it will remain a challenge nonetheless.
Buying a home helps you live your dreams of owning a property. Timing your home loan is just as important as opting for the right loan. The later you opt for a home loan, the tougher it may be for you to get a loan or make full use of home loan benefits.
(The writer is the CEO of BankBazaar.com)
