Qualifying for a Larger Home Loan May Come with Hidden Costs

The Hidden Dangers of Taking a Higher Home Loan Amount

When applying for a home loan, most home buyers consider the sanctioned loan amount as an indicative figure. However, this amount does not fully take into account the real financial state of an individual. As a result, taking a higher loan amount than required can lead to serious difficulties in repaying the loan.

A larger loan results in an increased EMI, where the majority of the monthly salary gets tied up in monthly EMI payments. This leaves little money left for personal investment, saving, and other expenditure. Even when the EMI seems affordable, the reduced financial flexibility would become a challenge in the future after having several more financial commitments.

Taking a higher amount loan not only means that the loan principal is high, but it also implies that the interest amount charged on the entire period of the loan would be higher. The tenure of home loans is usually very high, and a small increase in the loan amount can lead to a huge interest amount charged over many years.

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Having to pay a higher EMI, which would consume a major part of the monthly salary, might delay achieving other future financial goals. The financial goals may include retirement investments, children's education, traveling, business ventures, and emergency funds among others. Failure to meet such goals could result from taking a big amount of home loan.

It's a common misconception that increased income levels would enable individuals to meet the EMI requirements comfortably. However, several factors may prevent an individual from increasing his income, including changes in career or work environment, lifestyle changes, and health issues among others. Expenses may also rise in the future, including increased costs associated with medical care and ageing parents.

As shown in the table, taking a higher loan amount can lead to a significant increase in the total interest paid over the life of the loan.

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To avoid these pitfalls, it is recommended that an individual borrows what he is comfortable with and not what the lending institution qualifies him for. This ensures that the individual can live comfortably while meeting all other financial obligations in the future. Therefore, it is advisable to have a house which does not dominate your life.