Does Your Home Loan Cover All Costs Associated With A House Purchase?
Home loan for House purchase
Your home loan may not be adequate for your house purchase. There are some extra expenses as well for which you need to plan when you plan to buy a home.
Mr Ajay Mishra and his wife Anjali have been planning to buy their first home. Both of them work with reputed companies. But since they shouldered some family related responsibilities until now, they lived in a rented house for last 3 years. They have modest savings. The situation is likely to change, going forward.
Both of them have liked a flat in the vicinity where they live on rent. Ajay is likely to secure a loan worth 90% of the property value. Therefore, Ajay and Anjali are exploring options to collect remaining 20% amount which they will need for making a down payment. Since the couple has been lucky enough to get a flat which will be ready for possession in next 18-24 months.
But like many other inexperienced home buyers, they too are probably going to commit a mistake of underestimating the amount they need to raise on their own.
|Cost of the property||Rs 40 lakh|
|Loan Ajay can secure from a housing finance company||Rs 36 lakh|
|Total savings of the couple that can be liquidated||Rs 2.5lakh|
|Shortfall for making a down payment||Rs 1.5 lakh|
Ajay and Anjali forgot to consider some incidental expenses:
- Property registration fees
- Service tax payable
- 1-year maintenance that will be collected in advance at the time of possession
- Utility connection charges
In other words, they are likely to fall short of Rs 3-4 lakh. Considering their overall financial position, the banks or NBFCs (non-banking financial companies) are unlikely to sanction any other loan in the foreseeable future. And let’s not forget, when it comes to unsecured loans, banks are reluctant to lend. No wonder majority of Indians don’t get unsecured loans.
If you have gone through the pain of securing funds at the eleventh hour, you may relate to the Ajay and Anjali’s situation. It’s never an easy task, is it? Under such circumstances, people seek help from relatives and friends. Alternatively, they rely on unscrupulous money lenders who offer loans at usurious interest rates.
Now the question is what’s the way out to Ajay and Anjali’s problem?
Ideally, they should opt for an unsecured loan at a Peer-To-Peer Lending (P2P) platform.
P2P Lending platforms facilitate borrowers to avail loans from individual lenders looking to invest money in P2P Lending projects. P2P Platforms list loan projects after doing a careful assessment of each of them. Once the loan project is listed on the platform, registered investors on the platform, at their discretion, decide the amount they want to commit to the project.
P2P Platforms Vs. Banks
If Anjali was to borrow at a P2P Lending platform, considering all her pluses and minuses, let’s assume she could have secured a loan of Rs 1.5 lakh for 2 years at 22.0%. Don’t get shocked to see such a high-interest rates.
Please read this before you conclude anything.
Unlike, money lenders who ask you to pay interest at the end of every year and expect you to repay the principal at the end of the tenure, a P2P Platform will allow a repayment of principal from the first month itself. Therefore, as the principal gets repaid every month, interest on your outstanding balance keeps reducing.
Do you want to see the real impact? Consider the illustrations given below.
Annual interest option—offered by private money lenders…
|Scenario 1||Scenario 2|
|Loan amount (Rs)||150,000||150,000|
|Tenure of the loan (Years)||2||2|
|Rate of interest p.a.||18%||12%|
|Yearly interest outgo (Rs)||54,000||36,000|
|Total outgo by the time loan is completely repaid (Rs)||204,000||186,000|
The above table considers two scenarios. At the rate of 18% p.a. the borrower will end up paying Rs 204,000 after 2 years; whereas, at 12% p.a. interest, the total outgo will be Rs 186,000.
Now the question is, will Anjali get a loan at 12%?—especially in a city where she doesn’t know many people who are in such business? Private money lenders always try to make hay while sun shines.
But, unlike private money lenders, P2P Platforms don’t make any discrimination among borrowers. Depending on their risk profile, they charge interest.
EMI option—offered by P2P Lending platforms
|Loan amount (Rs)||150,000|
|Tenure of the loan (months)||24|
|Rate of interest p.a.||22%|
|Total outgo by the time loan is completely repaid (Rs)||186,761|
A careful observation would tell you 22% interest may appear usurious, but it is not, indeed. In fact, it is as good as securing a loan at 12% interest rate, isn’t it?
P2P Lending platforms are advanced financing options that intend to stop the practice of usurious lending by money lenders. At present many borrowers in India, secure little or no credit from banks due to the inflexible credit evaluation and loan processing of banks.
Here’s a caution…
You shouldn’t fall for any P2P Lending platform blindly. You should do a thorough analysis of its processes and operations. In India, P2P Lending platforms have been growing fast, but not all of them are ethical and reasonable.
You may count on i2iFunding
i2iFunding is an ethical P2P Lending platform meant for the benefit of ethical borrowers and investors. If you have a willingness to repay the loan and have reasonably good repayment capacity, in all likelihood, you may secure a loan at i2iFunding.
And here’s something unique about i2iFunding…
Before listing any loan project on its platform, i2iFunding classifies it in one of the six risk grades starting from “A” to “F”—wherein “A” denotes the highest creditworthiness. Therefore, no investor will try to unreasonably bargain with the borrower for higher interest rate on i2iFunding.
If Anjali was to apply for a loan worth Rs 1.5 lakh (since the home has been in the name of Ajay alone) following factors might have worked in her favour
- She’s a post graduate and works with an MNC.
- She’s employed with the same company for last 4 years.
- Anjali earns Rs 60,000 per month.
- Her average monthly bank balance for last 6 months has been around Rs 20,000.
Why are banks likely to deny her loan?
- She’s already taken two consumer loans in last 1 year.
- She’s been a guarantor for her sister’s education loan.
- After this loan, her EMI to take home income ratio will be 55%.
- Banks may need a guarantor for any additional loan, be it for a small amount.
For i2iFunding what may matter the most?
Despite tremendous family-related responsibilities in the past, Ajay and Anjali neither defaulted any loan nor did they delay the EMI.
Both of them have been transparent and are ready to share all real data about their expenses and income.
Ajay’s EMI to net take-home salary ratio will be 50% (considering home loan). However, the couple is likely to be on the sound footing—thanks to their achievements in the past 1 year. Both of them are expecting to get decent increments in the foreseeable future.
By the time, the first loan is repaid, they will have to arrange funds for meeting the additional costs at the time of possession. They will have to choices—either to build a special purpose investment corpus for that, or rely on i2iFunding.
In a nutshell
i2iFunding doesn’t lazily decline loan proposals, unlike banks. That being said, it evaluates all proposals painstakingly to arrive at the right cost of the loan. For home-buyers, i2iFunding may prove to be an angel.