One can opt for personal home finance for two reasons.
To provide a roof above his head
Investing in real estate, instead of buying it, is a method of long-term savings, which also earns high interest income.
For availing the personal home finance facility, one must approach a personal home finance company. The company would be ready to offer personal home finance at appropriate rates of interest.
The investor would benefit only if:
Interest earned in real estate investment > Interest payment to the home finance company
There are several features of the personal home finance, which should be kept in mind. They are discussed under the following heads:
Affordability: If an individual is availing the personal home finance facility, for purchasing a house. Then such investments do not earn him a return until and unless he is renting it out. His monthly salary should be sufficient enough to repay the loan. Generally, finance companies loan out to the limit where the monthly repayments would be 35-50% less than his monthly salary. This is basically the maximum amount of loan that a person can afford.
Level of Leverage: Just getting hold of a property is not enough in judging whether to take personal home finance. It is important to see to what extent the cost of the property is financed. Generally housing finance companies finance 80-85% of the property value. In that case the individual opting for the personal home finance should bear a 10-15% down payment and certain fixed costs like the following:
1. Processing and administrative fee.
2. Legal fees
3. Stamp duty charges
4. Property insurance premium
5. Accident insurance premium
In order to meet all these payments a liquid asset base is important.
Tenure of personal home finance: Personal home loans are offered for a period of 15 years, which may shoot up to 20 years in some cases. Long-term loans are accompanied by small monthly payments but high interest rates. So individuals with low monthly salaries can go for long term personal home finance but at some cost.
Interest rate movements: Earlier prevailed the fixed interest rate regime for personal home finance. But the interest level in the economy as a whole is highly volatile. Depending on the economic boom or recession the interest rate moves up or down. A fixed interest payment for personal home finance becomes difficult when this level of interest is higher than the economy interest rate. To accommodate such changes the floating interest rate was introduced, where the housing interest rate was in conformity with economy interest rate. But in floating loan the customer gains when the interest rate falls but is ripped off when the reverse happens. To address this problem, banks like HSBC have introduced Hybrid Loan. Here the person taking the loan for personal home finance has the liberty to choose the interest level which for 1, 2 or 3 years for the long term loan and then decide to float his loan.