Planning for the future does call for a perfect timing when it involves finances. Otherwise there is always a perfect time to do something when it feels right. Money matters need our attention and any decision which is taken haphazardly is capable of putting us in trouble. Getting a good job, buying a car, buying a house, getting married and starting a family of your own, retirement planning etc normally happen in an individual’s life. All these stages of life are interlinked and they depend a lot on how well you are able to manage your finances.
Our focus in this article is about getting a home loan at a perfect time. Purchasing a home is very important for many of us. You might wonder as to why there should be a perfect age or stage in life to get a home loan. Though there is no right age to buy a home, it’s prudent to think about it as there are many factors associated with this decision. Your status as a homeowner can either help you or hurt you financially.
Anyone above the age of 18 is eligible to apply for home loans but the best timing could be somewhere after 30 but before you hit 50. And this depends not only on your age but other factors as well like your financial position, affordability, cash flows, offers available in the market etc. The best stage is when you are capable of paying off the debt, maintain the property in a good condition and live in the house long enough to justify your decision to buy it.
From a lender’s perspective, when a person is earning enough to take care of his/her expenses along with paying for loan instalments, then it is good to go. Creditworthiness and credit behaviour are taken into consideration by the lenders. CIBIL score helps to ascertain one’s credit history. Age is important because it decides the tenure of the loan and that holds weightage for purchasing a house property. Earning and repayment capacity at a particular age in your life play a big role.
Making right choices at the right time is as important as avoiding wrong decisions capable of damaging your financial health. You may come across various opinions. Such as, to buy a house in the first ten years of your career might not prove to be worthwhile. The condition of the house that you bought at an early age might deteriorate and the appreciation in its value is also not guaranteed. The amount of housing loan available according to one’s earning capacity plus the EMIs to be paid usually end up using all your money in order to buy a house. This results in blocking the money which otherwise could have been diverted to generate income through other assets.
Investing all your funds in a particular kind of asset is not a good option. Housing is seen as a mode of investment by many, but that’s not a wise policy. Not all the properties fetch good rent or resale value. Plus the cost of maintaining them increases with the age of the respective houses. Real estate is a fast growing sector and if a buyer is able to get a better property in the same locality, it will be difficult to sell the house despite you wanting to dispose of it. It is better to diversify your portfolio into different kinds of assets, rather than concentrating them into one.
The following factors are important at any point in life before getting a housing loan.
- Your savings
- Your credit score and previous loan repayment history
- Capability to handle your finances
- Your bank accounts and other paperwork should be in order
- Your future goals like children’s education, retirement planning etc.
Impact of your age on housing loan
Age matters for home loan borrowers. Irrespective of whether you are salaried or a self-employed individual, the home loan tenure depends on your age. The home loan appraisal issues are different for buyers of different age. The younger you are, the longer you can take to repay the home loan.
Now let’s see the impact of buying a house at different ages. There are both pros and cons associated with the age groups in which we take the decision to get a housing loan and buy a house property.
Mid or late 20s
Advantages
When you purchase a home, you create an asset of your own. Sooner or later the property will fetch you some return in the short or in the long term in the form of rental income or a good appreciation in value by selling it.
When you are purchasing a home, you are also securing your financial future. Repaying the loan on time will add to your credit score.
At this age, overspending could ruin the financial strategy so using income strategically towards buying an important asset like a house could mould a young mind’s habits.
The money saved after repaying the loan can be used to generate returns from other avenues.
Banks take age into account while sanctioning loans as young people have more years left to repay the loan due to their longer employment term. Income will also increase with time enabling them to fulfil their obligations. A longer tenure loan is possible and a lower EMI with greater affordability follows. Young borrowers can prepay the loan as there are higher chances of them getting promoted to higher positions.
A young individual can take risks and an under-construction property can be considered for buying. Such options also prove to be cheaper when you construct a property by yourself.
Closing a loan early becomes possible. During the later phases of your life you can plan to buy another house or invest in other avenues. Lenders are conscious about debt-to-income ratios, so a young borrower is preferred.
A person in his/her mid or late 20s has lesser liabilities and has a lesser number of dependents than someone in late 30s or mid 40s. If either/both of the parents and/or the partner is earning then that can be an additional benefit to raise the eligible loan amount. Banks also come up with some favourable conditions for young people.
Disadvantages
EMI payments form a major part of your spending and you miss the opportunities to park your funds elsewhere. Once you start paying for a house, the investments for all the other financial goals are likely to get compromised. If you keep your EMI tenures shorter, especially when the income doesn’t increase to pace with the loan obligations, you might get financially stuck.
During the initial years of your career, there are a lot of possibilities which you cannot foresee. It could be regarding your personal life or career. You might shift to a different place, marriage could also change the mutual decision of a couple to ultimately settle down somewhere. So buying a house in one place may or may not turn out to be a good choice. If you decide to construct your own house, that too may see hurdles due to shortage of funds when you are young.
Early 40s but before 50s
Advantages
With age you have a greater clarity about where you want to settle and the kind of house you want.
By mid 40s an individual might have earned and saved at least for 15 years. So paying a down-payment will not pose a problem. A higher down payment will save interest payout and lesser number of instalments to pay up the outstanding loan amount will shorten the loan tenure.
Also at that age, EMI payments may not affect investments for other goals. You could have saved sufficient funds for other goals as well. You could be holding better job positions and earning good salary to pay even higher EMIs.
Disadvantages
The loan tenures may get shorter and the EMI burden may be higher. You end up paying a huge part of your salary towards loan instalments. Growth in income is required otherwise it will be difficult to get a loan itself.
If you have lived a lavish life and have not bothered much about your investments in the earlier years, EMI burden will get you into some serious financial mess.
If you want to purchase a house late, you must plan accordingly in your earlier years.
An under-construction property is riskier at this stage. As you are nearing retirement you can’t afford to be stuck with an incomplete property. Risk appetite for a young home borrower is more than someone who is in his 40s because they have family, children and other liabilities. Any unsecured loans or credit card bills must be cleared before applying for a home loan.
After 60 years of age
As long as the retiree is earning and is possessing significant assets, they can apply for a home loan. The income level might not be the same as before but based on their current income, they will be considered for home loan eligibility. The home loan tenure will be shorter. Income of the working children will be taken into consideration as lenders are not open to lend money to retirees. Flip/step down repayment option will be used in such cases. Reverse Mortgage Loans can help retirees who need financial support in old age.
What is the ideal age to get a home loan?
There is no ideal age to get a home loan. From the discussion that we had in the previous paragraphs, it is clear that though age is one of the primary factors, there are other situations or aspects that need to be considered. Your family responsibilities, life goals, future cash flows, the value you and your family attach to home ownership, etc play a significant role in deciding about the perfect time to buy a house. It depends upon when the individual buyer is ready to bear the expenses of the loan.
Banks and financial institutions have the delegation of power to deviate upto five years while sanctioning a normal home loan. However, this depends upon the policies of the lender and the presence of other positive factors make them relax the conditions. Debt-income ratios play an important role and only after working out the value of your income, assets and equity, will the lender come to a conclusion.
We may still hold that,
Majority of people when they think about purchasing a home, they do not really have the means to afford it fully or make an up-front payment. The property rates are skyrocketing and it is inevitable to take help from housing loans. Loans need to be repaid within a stipulated time. Usually the period lasts about 20 years. Make sure you are earning while you are paying for a housing loan.
Also, even if you want to delay it by a few years, you must start saving as early as possible for both your house and other goals simultaneously. Invest in a way that will help you to generate a large amount of corpus to meet your targets. You may consider equity funds for investing while you are young and your risk bearing capacity is flexible.
Do not wait till you get too old. Purchase a house before you hit the retirement age. If you want to own a house, it should happen before you stop working. Start planning accordingly.
Repaying the home loan before retiring is necessary. The banks also take into account this point and insist that you repay the loan before you retire.
We can say that mid or late 30s is a good time to take out a home loan because starting very early during the career can compromise your other investments. And if you are too late there shall be little scope for correcting your actions. This is the time when you are young and energetic. Even if there is some change in your financial planning, you can alter your ways to build a corpus for later years of life. If you are able to pay the first housing loan by your mid 40s, you can plan to buy another house or utilise your savings in some other fruitful manner. Otherwise there is no technique or formula that can guide to arrive at a perfect age. It all depends from person to person depending on the various factors explained in this article. At whatever age you choose to get a housing loan, you should be able to repay the loan without defaulting.
Relationship between your salary and home loan eligibility
You can find many home loan eligibility calculators to determine how much home loan you can get. Though the lending institutions will use many parameters before arriving at the home loan amount such as your monthly salary, other financial obligations, tenure of loan, other income, EMIs payable and other things.
Home loan eligibility: A borrower needs to fulfil the eligibility criteria to qualify for a loan. Non fulfilment of any of these criteria will result in rejection of the loan application. Meeting the required conditions at the beginning will smoothen the entire process. Age limit in general for salaried individuals ranges from 23 to 62. A self employed individual should be 25-70 years of age. Required CIBIL score is minimum 750. A salaried individual must be earning a minimum of Rs.25,000.
In case of salaried individuals in-hand salary or net salary is taken into account. Lenders consider take-home salary after deducting PF,ESI,Gratuity etc. therefrom.
Eligibility calculator: It works on a mathematical formula to determine the eligible loan amount. You can do better financial planning and reduce the chances of application rejection using this formula. By using the calculators one can check their eligibility without even contacting any of the housing finance institutions because if the loan gets rejected, the CIBIL score and their credibility to get other loans will get directly affected.
Steps to use the online housing loan eligibility calculators
- Enter the date of birth and city of residence
- Enter the net monthly salary
- Loan repayment tenure
- Other sources of income and
- EMIs of existing loans along with other obligations
- Know about other eligibility criteria before you approach your chosen bank or other housing financial institution.
To get a loan on better terms you should improve your CIBIL score, clear existing loans and opt for a joint loan.
The following table shows different salary levels, loan eligibility and respective EMIs The age of the applicant is considered to be in the early 30s. Interest rate is assumed at 6.75% to arrive at the figures of eligible loan and EMI.
| No. | Net salary after meeting all obligations(in Rs.) | Loan eligibility(Rs.) | Loan tenureIn years | EMI(Rs.) |
| 1. | 50,000 | 29,59,000 | 20 | 22,500 |
| 2. | 75,000 | 49,31,000 | 20 | 37,500 |
| 3. | 1,00,000 | 65,76,000 | 20 | 50,000 |
If the value of the house property is Rs. 50 lakhs, at least 20% percent of the same should be paid by way of down payment. That comes to Rs.10,00,000. Apparently the difference is Rs.40,00,000 to be met out of the eligible loan. In the first case the eligible loan is less than this and the borrower has to either pay more down payment or look out for some other ways to fill the gap. But in the other two cases as the salary is higher, the borrower can easily cover the cost of the house out of the eligible loan amount.
Now let us consider the loan tenure to be 30 years in the above example, keeping the rest of the factors the same.
| No. | Net salary after meeting all obligations (in Rs.) | Loan eligibility(Rs.) | Loan tenure In years | EMI(Rs.) |
| 1. | 50,000 | 34,69,000 | 30 | 22,500 |
| 2. | 75,000 | 57,82,000 | 30 | 37,500 |
| 3. | 1,00,000 | 77,09,000 | 30 | 50,000 |
By comparing both the tables, it is clear that the EMIs will remain the same with the change in tenure, however the loan eligibility will be more when the tenure is more. And in the first case the gap between the finance needed to find the house and the eligible loan amount will come down. The borrower has to pay the same monthly EMIs for ten more years.
In the above example we have calculated the eligibility based on the salary. Similarly we can determine how much loan we need to buy a house and then arrive at EMIs. In such cases the salary must be capable of meeting the EMIs. Ideally the EMIs should be kept around 35 to 40 percent of the salary. The reason being nearly 30% of the salary is spent on food, house rent and other expenses. 10% is set aside for emergency funds and 25-30 percent should be invested.
Suppose the purchase price of a house is Rs. 75,00,000 and the borrower is ready to pay 15% by way of down payment. The loan required in this case would be Rs.75,00,000-Rs.11,25,000=Rs.63,75,000. Interest rate is assumed at 6.75%. Tenure of the loan=20 years, the EMI comes to Rs. 48,500 with the help of the EMI calculators. If the EMI is 35% of the salary, then the salary must be equal to or more than Rs.1,38,500. In the same example if EMI forms 40% of salary then salary must be equal to Rs. 1,21,250. (Salary here means net salary post all other adjustments)
But if the tenure is changed to 30 years, then the EMI shall come to Rs. 41,400. Meaning that with longer tenure ,the EMI comes down and so does the salary needed to pay if off. It could be in the range of Rs.1,03,500 to Rs. 1,18,000. Similarly with a change in downpayment, the entire working will undergo a change.
What if the value of the house rises by 10-30 percent in the coming years? The following table shows how the EMI and the salary required to honour the payments will be decided in that case. Down payment is 20% of the value of the house. And the loan amount is correlated with increasing rates of the house property. Value of the house in the first year is Rs.75 lakhs, Rs. 85 lakhs in the second and Rs.1 crore in the third year. EMI is 40% of the net salary. Interest Rate=6.75%.
| No. | Value of the house(Rs.) | Down payment(20%) | Amount of loan (Rs.) | EMI when Tenure is 20 years(Rs.) | Salary required(Rs.) |
| 1. | 75,00,000 | 15,00,000 | 60,00,000 | 45,600 | 1,14,000 |
| 2. | 85,00,000 | 17,00,000 | 68,00,000 | 51,700 | 1,29,250 |
| 3. | 1,00,00,000 | 20,00,000 | 80,00,000 | 60,800 | 1,52,000 |
This means that the rise in the salary should be to a greater extent to combat the rise in the value of the property. So if it is Rs. 1,14,000 in year one, it should be up by almost 33.33%. If you don’t buy a house in year one, you may end up facing more challenges later as the value of houses are going up exorbitantly. A salaried person will find it difficult to match both if they don’t get an equal increment in their pay. More or less the same rate of hike is needed in the salary, as in the value of the property.
We can conclude that, an individual is the best judge in his/her own case to take all the factors together into consideration while buying a house with the help of a loan. Age is surely important but other factors also play a vital role when you seriously focus on getting one.
Smrutirekha Bhoi