The principle advice I give to home buyers looking to buy home property via home loan is go for maximum loan,so long as you can afford the EMI. The advice is constant irrespective of whether this is your first home or second one or one of your many residential properties. Here are the reasons for this. * Residential property is an appreciating asset; it's value rises over time as you already know. * Because its value appreciates over time at approximately 15 per cent p.a. on a long term basis it is fine to have a home loan where the interest rate is below 15 per cent. * You can conserve your funds (if you have them) and deploy them elsewhere; it would be ideal to deploy them in a fashion where you earn more than the rate of interest on your loan. Technically this strategy is also known as leveraging. Basically raising funds against a collateral of your own funds and in simpler words using your funds in a better way. * In addition you can also generate rent revenue from your property thereby augmenting your income. * Home loan provides tax benefits (with certain conditions if fulfilled) * Real estate also serves as a hedge against inflation. * Real estate also gives its owner positive strokes; a sense of pride,feeling of prosperity,security of money and safety of investment. Ideal level of funding for you Like I stated earlier; Go for maximum funding. But this advice is subject to three factors of your financial circumstances. Let's consider each one of them. A. What is your eligibility? Are you eligible for that level of maximum funding? A quick way to understand this is as follows. Consider EMI cost is about R 1,000 per lakh. So if you have to borrow R 40 lakh your EMI is likely to be about R 40,000 per month. Do you earn atleast 4 times this money i.e. to say do you earn R 1.6 lakh per month? In fact even if you earned R 1.2 lakh a month i.e. 3 times the bank/ home finance company might be willing to lend money to you. But for this strategy to work,4 times is a good idea. Often the interest rates may rise and thus you should have space to accommodate an increase in EMI. But this is only one part of the story. B. What is your Cashflow position? In order to exactly understand how much funding is really good,you need to work with some other calculations. These numbers are estimates of money that you need to put away for your various financial goals. If this area is overlooked you can land yourself in a pandemonium of sorts. The castle of your wealth can fall apart in an instant. Cashflow management is the key to succeed in using loan facilities. So how much of your cashflow can you allocate to such a purchase? Tread with caution here and make sure you have ample margin of safety with respect to the EMIs and increases therein. C. What to do with surplus funds? Definitely not be in a hurry to use them up. Part of the answer here lies in factor B above. Often to fund financial goals,monthly cashflow is far from adequate hence we need to use up some of the bulk savings or surplus funds we have at our disposal. After doing so what is it that you are holding onto? How much is the minimum down payment you need to make? Have you budgeted for medical and other general contingencies? What about some over-runs in expenditure? Budgets for holidays taken care of? Now,after doing all of this what is it that you are holding onto? The next step then would be to decide the level of risk and type of investment strategy we are willing to consider? There are several options here. You can consider buying another smaller property (or land) from your surplus funds and sell it after a few years. Use the profits to make full or partial prepayment of your loan. The same applies if you are willing to create a direct equity or equity mutual fund portfolio. If you are willing to invest into high yielding bonds,debentures or a debt PMS,again a similar logic would apply. If you are planning to deploy this money into lower rate deposits or anything lower than inflation you might as well take a lesser loan and use this money for down payment. Needless to say anything you do,make sure you increase or buy a term insurance cover or a mortgage insurance cover to protect your liability and to provide your family a hedge against this new liability. Author is Director,Transcend Consultingkartik@transcend-india.com
