Buying a home and moving into it is a dream of many individuals and home loan is a viable option to make this dream come true. However, buying a house by means of home loans means payment of a hefty amount as down payment, as well as monthly outflow in the form of Equated Monthly Installments or EMIs.
Even if you can actually manage to pay the down payment by collecting from various sources, the monthly EMI is a new strain on your finances.
The fact which should be kept in mind is that the amount you pay as an EMI every month depends on the loan amount you borrow, which again depends on the down payment you made for your house.
Nowadays, most of the borrowers are families where both the spouses are working. As a result, loan eligibility is more, and people think they can afford to borrow more simply because they are eligible to do so.
However, remember that banks grant you loan based on the net take home pay, and not based on what you save. Hence you must borrow only to the extent you can comfortably repay. This means, to buy the house of the same value, you should increase the amount you pay as the down payment. Wait till you can save to pay a considerable amount as down payment, so that your borrowing is reduced. If you still feel that this is a stretch, settle for a house with a lower budget.
Assuming you went ahead and bought a house by shelling out the minimum amount as down payment, by opting for a large loan, but now you face with the predicament of high EMIs. How can you meet your EMIs in a way such that your financial position is comfortable? Here are a few ways to plan your cash flows such that your EMIs are managed:
1. Remember your money is bringing in an asset:
First and foremost, instead of blaming yourself for having bought the house without doing the math correctly, be thankful that your monthly income is going towards servicing a loan for an asset.
2. Streamline a process:
Next, look at how you can streamline a process, which you can follow while you service your home loan. You can start off by analysing where you spend your salary other than on the EMI. Look at areas where you can cut back expenses, especially on the discretionary areas.
For instance, if you find out that expenses on eating out comes toR
s.
5,000 per month, look at how you can reduce this - either by reducing the number of outings or cooking attractive options at home which will consume much less money.
3. Create separate accounts for loan and savings:
Have separate accounts for servicing the loan and for savings. When you route all expenses through one savings bank account, it becomes difficult to keep track of the various debits in the account. Furthermore, if both you and your spouse are working, then there will be income credits in both your salary accounts. Discuss and take a joint decision before-hand on the expense heads which will be debited from your account and your spouse's account.
For example: you can decide to pay for all utility bills and household expenses from your account, while your spouse's income can be used for meeting lifestyle expenses. When you have different accounts for tracking different expenses, it becomes more disciplined and easier to control expenses. This will also allow you to track patterns of your expenses on the same head in different months. Spending less means saving more, and this automatically makes your cash flow position comfortable.
4. Maintain a contingency fund:
You should always maintain a contingency fund which will help you pay your EMIs in case of emergencies. Remember that when you take a home loan, it is your duty to service the loan under any circumstances. A failure to service your EMIs promptly will mark you as a defaulter, and as a result cause a dip in your credit score. Your contingency fund should be able to service at least 3 EMIs comfortably, if there is an emergency. Start building this corpus gradually in small installments when you begin your home loan.
5. Use extra money to prepay your loan:
If you have any excess savings during the month, invest in good quality mutual funds, which will give you good returns over the long term. If you build a healthy corpus at the end of 2 or 3 years, you can partly prepay your home loan to bring down the EMI amount or tenure.
Whenever, you receive any windfalls or sudden gains, use it wisely by partly prepaying your loan, instead of spending it on purchasing unnecessary luxuries. When you partly prepay your loan, you can either choose to reduce the overall tenure of the loan, or bring down the EMI amount. If monthly cash flow position is really tight, then you can choose to cut down the EMI till your cash flows improve. However, this strategy might not be as useful as bringing down the overall tenure of the loan. This will reduce the total interest outflow.
Some banks offer you a step-down EMI option, wherein you can bring down your EMI amount temporarily, till your income and cash flows stabilise, and then increase it back to the usual level using a step-up EMI option.
BankBazaar.com is an online loan marketplace
Source:NDTV,BankBazaar
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