Living in one’s own adobe is a dream come true. However, given the large amount of money required to be able to achieve this dream makes people keep postponing their plans. Invariably the home buyers have two major queries. First, how can they get a more competitive housing loan rate and second how can they get 100% funding of the property cost. Let us approach this query of 100% at two levels. Read on to know about it.
Is it possible to get 100% funding?
If we were to put it simply, the answer to this is no. One cannot get full funding on the cost of property. Following are the reasons for it:
First, the Reserve Bank of India limits the quantum of loan that can be extended. It varies from 90% to 75% depending upon the loan amount. And since banks are governed by the central bank policies, they cannot go beyond the set thresholds even if they find both property and borrower worthy of full funding.
Second, the banks would want to have a commitment from the buyer. Higher portion of contribution from the borrower on the total cost only shows the financial well being and instills more faith in the repayment capacity. This can even lead to discounting of housing loan rate by the lending institution.
Third, lending always comes with a risk and to cover the risk, the lender would not want to expose to 100% value of the collateral. In case the borrower is unable to pay, the lender may not be able to liquidate the collateral and cover the risk.
Having said that, there is still a way to avail the full funding. If the borrower has the capacity to repay, the self funding portion can be managed through a personal loan or a gold loan. But one needs to bear in mind that the interested levied on a personal loan is much higher than housing loan rate and even the term is shorter.
Should you be availing it?
One must carefully assess the reaction to the action of going for a 100% funding on the cost of buying that house.
First, it has potential to put a lot of stress on the available financial pool. One may be required to prune monthly expenses to be able to achieve repayment of monthly EMIs. This can potentially put pressure on day to day requirements.
Second, one must take cognizance of the fact that no lender would lend beyond 50% of the gross income. So, while there is a limitation on this front, if the borrower goes to utilize this benchmark of lending, the disposable income would get limited.
Third, a major part of the EMI being paid in initial years gets amortized against the interest. There are innumerable EMI calculators available on the net and one can use these free tools to understand the complexity of the actual loan amount repayment. Statistically the home loans do not run until the last month as per the amort schedule. It gets paid much earlier. This would mean that the cost of fund will turn out to be much higher in comparison to what one would have thought it to be.
Four, in an unfortunate event of an exigency, the borrower may find himself completely hard pressed for funds to meet the unexpected money requirement.
The full funding while is not legally permitted, the buyer may look at raising funds from other loan instruments however, the same will come at a higher pressure of financial capacity and also the cost of housing loan rate will increase. To save money for a few years and then go for buying a house may turn out to be a better option for the home buyers.