Considerations Before Using A Personal Loan For A House Loan Down Payment
Banks only lend up to 90% of a home’s worth as a mortgage; the buyer is responsible for covering the remaining 10% as well as any other costs. Can filling this deficit with a personal loan be possible? Property purchases have become more accessible due to the simple availability of ready homes & mortgage loans. Banks only lend up to 80% of the value of the property as a mortgage; the buyer is responsible for paying the remaining 10% as well as any additional costs related to the transaction. Yet, you might need to think about other choices for completing this down payment if you don’t have enough money saved.
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Because they are either desperate to own a home of their own (the Coronavirus-induced lockdown may encourage more people to consider buying a home of their own) or want to avoid paying exorbitant amounts as rent, buyers frequently consider applying for a personal loan at this point rather than waiting for another few years to save money for the down payment. Banks are quick to grant personal loans, giving you access to instant liquidity, but you should understand how personal loans operate and how purchasing one may affect your financial situation in the future.
Interest rates on personal loans
When compared to home loans, personal loans have substantially higher interest rates because they are unsecured loans (banks give these loans based solely on your face value and without any form of collateral). A buyer can currently obtain housing loans in India with interest rates between 9% and 11%. Personal loan interest rates, meanwhile, are currently between 11% and 24%. This would substantially raise the price of purchasing your property.
Only in cases where the buyer has no other options are personal loans advised. With their higher interest rates & shorter payback terms, they can make customers face a greater financial hardship. Only those with a strong credit history and consistent income can get personal loans with lower interest rates. Hence, if a personal loan is your sole choice, keep a decent credit score, advises a senior source in a top Mumbai fintech, on condition of anonymity.
Impact of personal loans on credit score
If a person chooses to use a personal loan to make a down payment on a home, this will also have an effect on his creditworthiness. Because you used some of your creditworthiness & repayment capacity to obtain the personal loan, this will have an impact on the size of the mortgage that the bank is ready to grant. Generally, you shouldn’t utilise more than 40% of your monthly take-home pay for EMI payments.
EMI calculation for a personal loan and a home
Let’s say you’ve decided on a home worth Rs. 50 lakhs. Due to your excellent credit and prompt repayment of all previous credit card loans, the bank is willing to grant you a housing loan of Rs 45 lakh (90% of the property value). Due to the fact that you are a long-time customer, the bank is likewise willing to make an exception for you.
At an interest rate of 8%, the EMI for a 20-year term comes to Rs 41,822.
For the down payment, stamp duty, and registration fees, you now need Rs 8 lakh. You obtain a personal loan for this.
The EMI equals Rs 17,394 for a five-year term at an interest rate of 11%.
Hence, your monthly EMI expenses will be Rs 59,216.
Your monthly income must be around Rs 1.48 lakh for a lender to grant these two loans with a combined EMI of Rs 59,216 (the total of all your EMIs must be more than 40% of your net monthly income).
It is important to remember that the two loans would severely restrict your ability to borrow at this stage. You might not be able to obtain any other loan in the event of an emergency.
Tax advantages for personal loans
Tax deductions for personal loans taken out for specific purposes, such as house remodeling or acquisition, are permitted by the Income Tax (IT) Act. Buyers may claim deductions for interest paid on personal loans under Section 24(b) of India’s Income Tax Law if the funds are used to pay a down payment on a home. Refunds for self-occupied properties are capped at Rs 2 lakhs annually. Even if you use this money to renovate your home, this still holds true. The total amount of interest could be deducted, nevertheless, if the property is rented.
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