Too young for a home loan?

Got a question about your money? What you should or should not do with it?

Our expert Devang Shah has the answers. Got a question? Please write to us.

I am 23 with a monthly take home salary of Rs 20,000. I contribute Rs 14,000 to my family.

I would like to take a home loan of Rs 10 lakh (Rs 1 million).

Am I too young for a home loan?

- Sudharsan Rangaswamy

Dear Sudharshan,

It is encouraging to see how you are taking financial responsibility for your family.

Your age should not discourage you from borrowing for a home. But there would be certain issues related to your age:

1. Where will you bring in the money needed for downpayment?
As you know, the lender will only pay up around 80% to 85% of the cost of the home. You will have to put in the balance which is also known as the margin.

2. Do you have a financial track record?
The lending bank/ institution would like to see a financial track record, based on which they will decide whether to lend, how much to lend and for how long to lend to you. Do you have one already? You have just started working and would not have income tax returns for the past few years. Or salary statements.

3. Will you be able to afford repayment?
A loan for Rs 10 lakh for around 15 years may have an Equated Monthly Installment (monthly payment to be made to the home loan company) close to Rs 10,000. Will you be able to pay for this?

4. Have you looked at other situations cropping up?
During the duration of the loan, are there other events closer in time (marriage, higher education) for which you might need money? If yes, will there be enough left for you to save up for those goals/ events after paying the EMI, your family (Rs 14,000) and other expenses?

If your family is dependent on your income, please make sure you take a term life insurance cover to provide for them should something happen to you. Term life insurance is the most basic form of life insurance. It is also the cheapest. All you have to do is pay a premium every year and should something happen to you, your family gets the money. If you survive, you or your family get nothing.

Also, if you do take a home loan, take an insurance policy to cover up the amount of the loan.

For readers wishing to know more about home loan insurance, Get Ahead adds this information.

In home loan insurance, the loan is insured not the home.

What this insurance takes care of is the amount you will owe the home loan company or bank.

Also, what you have paid is not taken into account; just what has to be paid.

Let's say you took a home loan of Rs 10 lakh (Rs 1 million).

Let's also assume that after you pay up Rs 2,00,000 of the principal amount, you meet with a fatal accident. This means, a balance of Rs 8,00,000 still has to be paid to the home loan company. This is the amount the insurance company will cough up. They will not pick up the tab on the entire amount (Rs 10 lakh), only the balance amount owed (Rs 8 lakh).

An exception is ING Vysya Bank's home insurance loan. In the event of something unfortunate happening to you, not only will the balance loan amount be paid off, your family will also receive the principal amount that has already been repaid on the loan (Rs 2 lakh in the above example).

This way, your family is not left without a roof over their head; neither do they have the hassle of paying up the EMI.

Of course, like any insurance policy, a premium will have to be paid. The insurance companies and home loan companies are not too forthcoming with how much this will cost, but say the premium will be decided on a case-to-case basis.

This premium will depend broadly on four conditions:

1. Age of the person taking the loan: The older you are, the higher the premium.

2. Loan amount: The larger the loan amount, the higher the premium.

3. Tenure of the loan: The longer the repayment period, the higher the premium.

4. Medical record of the individual: If you are in good health, the premium will be lower. For instance, if you have already had a heart attack or are in the high risk category, the premium will be higher.

• To find out more on the subject, read Have a home loan? Insure it.

Illustration: Dominic Xavier

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