Buying a home is something we all aspire to. Home ownership gives us an appreciating asset and it also gives a sense of security and peace. As per the 2019 Aspiration Index survey, home ownership was the biggest life goal for most Indian millennials. The data flies in the face of the notion that millennials avoid long-term financial thinking.
Home ownership isn’t easy. The costs are high, and it’s rare to find the home that ticks every box. One key parameter of home ownership is the property’s size. After all, it shouldn’t just meet your space requirements now, it should also address the future needs of a growing family. The home should also reflect our upward social mobility, and if it can relieve any peer pressure we may be feeling, it would be perfect.
But what we’re seeing now is a preference for smaller homes. As per the BankBazaar Moneymood 2020 report, 72% of all home loans applied for in 2019 were for loans under Rs. 30 lakh. This implies that a large number of homes that are being bought are small-sized.
What this tells us is that despite economic uncertainty, Indians have remained focussed on achieving key life goals such as home ownership, though they have had to make some pragmatic choices such as buying smaller homes.
For an early jobber, buying into budget housing schemes is the ideal way to foray into real estate investing. There’s a proliferation of affordable housing schemes all over India. Alongside, there are also several macro factors such as low interest on home loans that assist home ownership. The real estate market has seen lower levels of interest in premium housing. This is due to lower flows of credit and liquidity in the economy. However, the interest in budget housing indicates that first-time buyers are keen on achieving their goals with smaller borrowings.
A small home may not be the home of your dreams. But there are several advantages in starting off with one. If you are having recently started working and plan to take a home loan, here is why affordable homes can be ideal for you.
Loans For Smaller Homes Are Easier To Get
Your income and repayment capacity are amongst the significant parameters that lenders assess before granting you a loan. When you are at the beginning of your career, your income will be low, and therefore the borrowings you’re eligible for will also be low. Thus, you may not be able to borrow large without the help of a co-borrower (such as a spouse), nor would it be easy for you to make a bigger down payment on a large house. Therefore, your options narrow down to small-sized houses which may entail small-sized borrowings.
Smaller home loans come with the lowest interest rates, which means your EMIs will also be smaller. The bigger you borrow, the higher your interest rate tends to. Normally, banks reserve the lowest rates for loans under Rs. 30 lakh. The difference in rates on such small loans and bigger ones (Rs. 75 lakh upwards) could be upwards of 50 basis points.
Smaller Loans Are Easier To Pay Off
Assuming you have stable income, you’ll be able to repay a small loan easily and quickly. If you’re young, your income growth has plenty of headroom. So while your income will grow with time, your EMI will remain the same, allowing you to make quick progress on repayment. Hence, there’s a larger likelihood of full repayment, no default, and a clean debt slate. This will serve you well once you decide to upgrade to a bigger home in the future.
Smaller Home Loan Provides Headroom For Further Borrowings
If you take a smaller home loan, which is less than your borrowing capacity, you can easily use the remaining borrowing capacity to fulfil your other crucial financial goals. This may include taking a car loan, or an education loan for furthering your studies, or simply having more cash in hand to finance various life goals such as an early retirement.
With the government promoting affordable housing, a first-time homebuyer can avail interest subsidy on a small-ticket loan. The Pradhan Mantri Awas Yojna (PMAY) is a credit-linked subsidy scheme (CLSS) that provides to eligible first home buyers an interest subsidy of up to Rs. 2.67 lakh. However, the loan should be sanctioned before March 31, 2020, and the buyer shouldn’t be owning a pucca house.
Tax Benefit Under Sections 80C, 24B, 80EEA
A regular home loan borrower enjoys tax deduction benefits under Section 80C of up to Rs. 1.5 lakh and under Section 24 of up to Rs. 2 lakh. For eligible home loan borrowers, there is another tax deduction up to Rs. 1.5 lakh under Section 80EEA. This benefit can be availed by home loan borrowers who purchased their home in FY2019-20. Only first-time buyers of homes whose stamp duty value is less than Rs. 45 lakh and whose sizes are as prescribed in the section, can avail this additional deduction.
An interesting finding in the Moneymood 2020 report was that women borrowers pipped male borrowers in average home loan ticket sizes in 2019. While the average female home loan ticket size stood at Rs. 25.64 lakh, for men it was Rs. 23.66 lakh. With better interest rate offerings for women and additional benefits like lower registration charges, it is a favourable time for more women to become home owners.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.