What can be done to avoid risks associated with a home loan?
1 min read . Updated: 18 May 2023, 11:36 PM IST
PremiumWhen taking a home loan, consider interest rate fluctuations, affordability and financial stability, legal and documentation risks, and credit score impact. Mitigate risks by researching loan options, maintaining a good credit score, saving for a down payment, and building an emergency fund.
I am planning to buy a house and so evaluating some home loan options. What are the potential risks or challenges that one should be aware of when taking a home loan, and what measures should I take to avoid the risks?
—Name withheld on request
Home purchase is one of the critical decisions of one’s life and here are some key considerations that you can follow:
Interest rate risks: One of the primary risks is the fluctuation in interest rates. If you have a floating-rate loan, the interest rate can vary over time, leading to changes in your monthly payments. To mitigate this risk, consider opting for a fixed-rate loan or carefully evaluate your financial capability to handle potential interest rate hikes. (Interest rates in India got raised six times on different occasions last financial year).
Affordability and financial stability: Taking on a home loan means committing to long-term repayments. Ensure that the monthly installments fit within your budget and won’t strain your financial stability. Assess your income, expenses, and future financial plans to ensure you can comfortably meet the loan obligations.
Legal and documentation risks: Home loan processes involve extensive paperwork and legal formalities. Ensure that you thoroughly understand the terms and conditions, including the fine print, before signing any documents. If possible, engage a legal professional to review the loan agreement and associated legal aspects to minimize the risk of any unforeseen issues.
Default and credit score impact: Failing to make timely loan repayments can result in default, negatively affecting your credit score and overall financial health. Maintain a disciplined approach towards loan repayments and have contingency plans in place to manage any unexpected financial hardships.
To mitigate these risks, consider the following measures:
Conduct thorough research and compare loan options from multiple lenders to secure the most favourable terms and conditions.
Maintain a good credit score by paying bills on time and managing existing debts responsibly.
Save for a substantial down payment to reduce the loan amount and associated interest costs.
Build an emergency fund to handle unforeseen expenses or financial setbacks.
By being aware of these risks and taking proactive measures to mitigate them, you can navigate the home loan process more effectively and secure a loan that aligns with your financial goals and long-term stability.
Anuj Sharma is chief operating officer – IMGC (India Mortgage Guarantee Corporation).