Participation of women in the workforce has been rising in India. With rising women employment, the need to depend on male members for livelihood has reduced.
It has led to a dignified life for lakhs of women. However, being a single mother takes an emotional as well as a financial toll on the individual.
It alters the financial dynamics of the household. Though single mothers can avail financial services without any discrimination, the altered financial situation has to be taken into consideration.
Since having a home is a necessity, housing finance naturally becomes a crucial financial tool for single mothers. Here are a few housing finance tips for single mothers.
Spend time researching
The importance of research cannot be overstated. Being a single mother, you already have a burden of responsibilities and getting bogged down by a wrong home purchase should be avoided.
Choosing a financial institution for housing finance is the final part of the research. Start with assessing your financial profile.
Housing finance is a long-term commitment. It is essential to have a clear idea of your finances so that it does not interfere with other important financial goals.
After assessing your financial profile, search for projects and localities with properties in your budget.
Take factors like institutes for children's education, security and public transport into consideration. With a list of potential localities and projects, conduct thorough research for the most suitable housing finance option.
Many banks and non-banking financial institutions also offer tailor-made housing finance options for single mothers.
Government of India-led schemes are offered through various financial institutions and housing finance companies which assist the first time home buyers with interest subsidy of an amount as high as approximately Rs 2.5 lakh.
Avoid long tenures
One of the most common mistakes made by borrowers, including single mothers, is to opt for the longest tenure to reduce the EMI.
Choosing a long tenure also increases the loan amount eligibility. But low EMIs come with certain costs. Though the EMIs are low, you end up paying more over the tenure of the home loan. Here is a rough calculation for better understanding.
If you opt for a home loan of Rs 30 lakh for 15 years at an annual interest rate of 10%, you will end up paying Rs 28 lakhs in interest over the period of the loan.
The monthly instalments will be around Rs 32,328. Alternatively, if you opt for a 20-year tenure to reduce the monthly instalments at the same interest rate, you will end up paying nearly Rs 39.5 lakhs as interest.
The EMI will fall 12% to Rs 29,000, but interest payments will rise by a significant 41%.
Even if you opt for a longer tenure to keep your monthly obligation low, the suggestion is to try and make part payments whenever you have surplus funds.
Part payments will help you reduce the loan balance tenure, thereby reducing the interest outgo. Part payments are adjusted towards your balance principal amount and do not attract any penalties
The location of the house is a crucial factor for single mothers. A lot of options are eliminated due to security concerns and educational needs of the children.
You may have to choose costlier options, which will inevitably lead to a need for a higher loan amount. Opting for a longer tenure increases the loan amount eligibility, but the interest amount surges simultaneously.
A better way to increase home loan eligibility is to add co-applicants. You can add up to three earning members of your family as co-applicants to increase the loan eligibility.
Declaring sources of fixed income like rent and interest from investments also help in improving loan eligibility.
Use loan EMI calculators and loan eligibility calculators available online to get a better idea of housing finance options suitable to your financial profile.
Increase the down payment
Contrary to the popular understanding of housing finance, financial institutions do not provide loans for the entire cost of acquisition.
Typically, a home loan covers maximum up to 85-90% of the market value of the house. The balance amount has to be paid as down payment, also known as bridge funding.
A higher bridge funding reduces the loan amount and hence the interest payment over the years. Having manageable long-term liability is important, as single mothers are also responsible for all the needs of their children like education and marriage.
The aim should be to limit the EMI payment to 60% of the net post-tax income. It could be easily done by paying a higher upfront amount.
Repayment/Part Prepayment/Foreclosure Charges
Consider the situation, you get rewarded with an annual bonus for your stellar performance at work. Being a single mother with an active home loan, what should you do with the money?
It is advisable to use the funds towards repayment of long term debt i.e. your housing loan, or consider making part payment thereby reducing the balance tenure of the loan.
In all such cases do keep in mind that currently as per regulation there are no prepayment charges applicable on any such full repayment or part payment.
You may, however, have options in case of part payment of the loan, that is to reduce the current monthly obligation i.e your EMI or may opt for reduction of your balance tenure
Monitor credit score
Financial institutions in India check the credit score of the applicant before disbursing home loans. Specialised agencies like CIBIL maintain the credit history of citizens and provide the information to financial institutions who need it.
A good credit score helps in reducing the overall costs of housing finance and ensures that the housing loan facility is granted to you.
A score over 750 is desirable and can help single mothers get home loans at attractive rates. Many single mothers are not familiar with the loan process and assume that lenders check the credit score only once.
Lenders generally check the credit score before accepting the application, but they may recheck the score before disbursing the loan amount.
It is important for you to have a good credit score and maintain it throughout the loan process.
The simple way to maintain a healthy score is to ensure all your liabilities i.e credit cards, any other loans, utility bills are paid on time and not after the due dates.
With the advent of scores of financial institutions in the country, it is easy to get a home loan.
It is, however, important to opt for a credible lender. Housing finance from a credible lender ensures that you do not have to worry about anything except your family and work.
With a loan from a credible lender, the risks of hidden charges also get eliminated.
(The author is Chief Business Officer, Aadhar Housing Finance)