Isn’t owning your dream home one of the most cherished dreams we all tend to have as soon as we start making money? Surely that is at the top of our priority list of financial goals, right? But we are rarely able to match our actions with it.
And what excuse do we have? More often than not, we just keep paying the rent and just shrug and say it’s too “early” to take out a home loan when we’re in our twenties. While home loans are available as a gateway to owning your home, it’s surprising that a dream we hold dear is often carried over to the later years of working life instead of being front and center.
Curious as to why taking out a home loan to own your dream home in your twenties might be a wise decision? Read on as we dig deeper into that thought and come up with several reasons to say yes to that big financial milestone in your 20s itself.
1. Extract the benefits of the progressive home loan facility
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In their attempt to continuously attract new borrowers to take the giant leap in offering a home loan, lenders continue to improve the consumer experience through strategies such as product innovation and loan offerings. such as concessional interest rates, waiver of processing fees, etc. One of those products specifically designed to attract millennials to mortgage lending is the “Rising EMI”.
In this facility, the repayment of the EMI mortgage loan is linked to the expected growth assumption of the future income of the millennial borrower. In line with the increase in income, a gradual increase in the amount of EMI after the first years starts, which is proportional to the supposed / expected increase in the borrower’s income in the coming years during the term of the mortgage. . Lenders generally tend to structure this home loan facility in such a way that the rate of income growth is assumed to be at a pre-defined rate, for example 5% -8% per annum, and therefore, accordingly, the EMI increases proportionally at predefined intervals every 3 years or 5 years.
Since the magnitude of income growth is typically higher for Millennials in their 20s than in their 30s or 40s, this mortgage repayment facility works well for this target group of these young borrowers. With this facility, they can grab the double benefit in the form of owning a home at a young age coupled with the lower EMI payment during the first few years of the loan repayment term. However, while choosing this EMI facility, never forget that if the income does not increase as expected, the repayment may become difficult with increasing EMI amount at gradual intervals.
2. Longer period for the appreciation of the value of the property
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Another crucial advantage of being a young mortgage borrower is that the sooner you buy a home, the longer your home will witness an appreciation in value. over the years. Although the expected appreciation in value depends on several factors such as inflation, location, market demand and supply, infrastructure, etc., the availability of a relatively long period of time tends to be to increase the chances of witnessing an appreciation in the value of the property.
Also read: Does it make sense to consider real estate as part of your portfolio?
3. Higher mortgage eligibility
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Millennials in their 20s generally tend to have relatively less financial obligations to those in their 30s and 40s, which works in their favor when applying for a home loan in their 20s.
Since lenders consider a borrower’s IME-to-income ratio to be one of the most crucial parameters when evaluating their repayment capacity, a lower IME-to-income ratio automatically increases the mortgage loan. chances of eligibility and approval. Simply put, your IME to income ratio is the proportion of your monthly income already used to pay off the loan IMEs. Having a higher ratio depicts an imbalance between your monthly income and EMI repayments, indicating higher chances of default in the future whenever an adverse life event, financial demand, or additional expense arises. impromptu in your financial life. While on the other hand, relatively low responsibilities and financial commitments in the early years of working life allow them to have a lower or zero MIE-to-income ratio, which often proves to be beneficial for millennials in the workplace. around twenty.
Another reason for the higher loan eligibility for millennials in their twenties is that the further away you are from your retirement years, the more years of working life you have to easily repay the mortgage with. existing income. This is why lenders are generally reluctant to give a home loan to people in their late forties or fifties as they have fewer years of work left and the risks of life uncertainty tend to increase in the future. this age group.
4. More breathing space in the near retirement years
Since mortgage terms extend over 20 to 30 years to spread the burden of EMIs over the long term, taking out a home loan in your 30s or 40s increases the likelihood of having to repay the IMEs on the mortgage until the end of your life. the very end of your years of professional life. , that is to say until your retirement around 60 years old.
What it does is rob your finances of the breathing space you need so badly in your final years of working life. While if you opt for a home loan instead in your twenties, you are more likely to comfortably complete the repayment before your retirement, that is, your fifties.
In addition, because your income in your 30s and 40s is likely to be higher than in your 20s, you are also more likely to prepay the mortgage with your excess funds, before the lease expires. thus leaving even more respite when it comes to the last years of professional life.
Also read: From Real Estate to PPF: The Best Investment Options to Help Millennials Retire Early
5. Availability of longer mandates to shorten IMEs
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Millennials earning in their 20s tend to have a better chance of getting a longer repayment term on their mortgage, which can be up to 30 years for most lenders. This is because millennials in their twenties have more years of active working life ahead, which gives them a long period of time to sufficiently repay EMI mortgage obligations.
Now, what does this availability of longer tenure mean for a millennial borrower? Having a longer repayment term ensures that your EMI loan obligation is spread over a longer period, which means lower monthly EMI expenses.
For example, suppose you aim to take out a home loan of Rs 50 lakh offered at an interest rate of, say, 7% pa. Now your NDE by going for a 15 year term would be close to 44 941 rupees, Rs 38,765 for a 20-year term, Rs 35,559 for a 25-year term and Rs 33,265 for a 30-year term. Therefore, the longer your tenure, the smaller your EMI amount. But the only downside to opting for a longer repayment term is a higher overall interest cost of the mortgage, which, in these different durations, turns out to be Rs 30.89 lakh, Rs 43.03 lakh, Rs 56.01 lakh and Rs 69.75 lakh, respectively, for 15, 20, 25 and 30 years of service.
But still, it is better to opt for a longer term. Here’s why. Having a lower EMI burden every month due to a longer tenure period which in itself allows more room to contribute to other financial goals, also saves you for mortgage prepayment which contributes more to reducing the overall payment of interest. Even if you couldn’t separately accumulate a corpus for prepayment or foreclosure, you can continue to make partial prepayments as you have excess funds over the term of office. This way, you get the benefits of smaller EMIs and also reduce interest charges by making prepayments where possible. In addition, if you opt instead for an aggressive repayment schedule thanks to a shorter tenure period and therefore larger EMIs, you run the risk of restricting your finances and being pressured into repaying investments or contracting. more loans whenever financial demands or any adverse life event occurs, resulting in financial deficit. So the key is to go for longer repayment terms and then make prepayments where possible.
Now that you know the many benefits of taking out a home loan in your 20s, the first step to making that dream come true is to accumulate the down payment, right? Click here to find out more.
What should you pay attention to before applying for a mortgage?
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Obviously, taking out a home loan is a big step and probably the biggest financial commitment of our life. Even the historically low interest rates on home loans are tempting enough to make us think about taking the leap of faith into a home loan, right? But remember, home loan IMEs tend to take up a large chunk of our monthly budget. And the huge cost of owning a property, coupled with the total interest cost of home loans, makes it important to make sure you’re financially prepared to take on this responsibility.
Besides planning for down payment corpus buildup, other key steps that make up a strong financial plan include building and maintaining a good credit score, checking your EMI accessibility on calculator tools EMI online including the expected EMI amount in your emergency fund and compare as many lenders as possible before focusing on any.
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