Moving into a home of your own is an exciting dream that most of us hope for. Funding for your new home can be nightmare if you don’t plan it out well. Majority of home buyers use home loans to fund their purchase. You will still need to find enough money for the heavy down payment, not to mention the EMI that will take large chunks from your salary each month. How much you pay as EMI depends on how much you have borrowed in the first place. The amount you decide to borrow may be based on how much your financier says that you are eligible to borrow. Since both partners in a marriage are working in most households nowadays, there is a good chance that you will be eligible for a huge amount. However, it is important to note that just because you are eligible to apply for a large sum, it doesn’t mean that you should. The net take-home pay is what your bank takes into consideration when deciding how much you are eligible for. It does not matter to them how much you can save. Thus, it is important that you only borrow an amount that you can afford and comfortably repay. What do you do then? Make sure that you save up as much as you can before you avail a loan. That way, you will have a large down payment and lesser amount to be borrowed. If you have tried that and still feel the EMIs are too large for you then try to find a house a little below your ideal home but well in your budget. Even in those months that you want to splurge on a big spend but can’t because you have the responsibility of the EMI, just remember that your income is going towards an asset which has a good chance of appreciating, and not on some unnecessary expense that will not do anything for you in the long run. Once you have saved up and given the down payment, here are some ways to make sure that your monthly financials are well managed:
- First thing that you must do is figure out where your money is going other than your EMI and try to cut back expenses on that. For this, you must chart out all your expenses so that you can figure out where your money is going. For example, if you find that the amount that you spend on eating out is coming to Rs.6,000, find ways that you can reduce this.
- One smart way to keep a close eye on your expenses is to have a separate account for servicing the loan, other than for savings. When you have various debits in the same account, it becomes difficult to keep a track of it. If both you and your spouse are earning, it is important that you discuss where debits will be made from. For example, one of you can take care of the household expenses while the other takes care of the lifestyle expenses. Having different accounts for tracking different expenses will make it easier to control expenses and make you more disciplined. What’s more, you can figure out exactly what the pattern of your expenses are.
- You can only save if you spend less. It’s important that you save for a rainy day. There will be instances when you will have an unexpected expense that will throw your financial plan out the window. For example, if you have a relative admitted in the hospital, you will have to spend the money that you have set aside for your monthly EMI. In such an instance, you need to have a backup or a contingency fund. If you don’t, and you don’t pay your EMI, you will be marked as a defaulter, which will cause a dip in your credit score. Your contingency fund should be big enough to service up to three EMIs. You can start building this emergency fund that you can dip into from the time that you first get your home loan.
- Mutual funds is another smart move that you can take to invest any excess money that you saved during a particularly good month. If you pick a good quality mutual fund it will give you good returns over time. At the end of a few years if you find that this has built into a healthy corpus, you can prepay a part of your home loan so that the EMI amount or tenure reduces.
- Similarly, there may be times when you get an unexpected lump amount, be wise and use this amount to part prepay your loan. Don’t fall for temptations and spend it on unnecessary luxuries. If you decide to partially prepay your loan, you can choose to either bring down the EMI amount or reduce the overall tenure of the loan. You must be comfortable with the monthly cash flow that you have after reducing the EMI. If you find that you are not comfortable with this amount, you can cut down the EMI until your cash flow improves. What is even more useful in such a situation is bringing down the overall tenure of the loan so that the total interest outflow reduces.
- There are certain banks which offer you a step-down EMI option as well. If you go for this option you can bring down your EMI amount temporarily. It can be increased once your income and cash flows stabilizes using a step-up EMI option.
- When you have to repay multiple debts, it is better if you prioritise and sort them according to the interest rate they carry. You should focus on repaying the loan with the highest rate of interest first. Clearing off the debt with the highest rate can help you save in the future. For example, if a person has a credit card loan, personal loan, home loan, and car loan, he or she should focus on repaying the credit card loan first since they often carry the highest interest rates. If not paid on time, it is likely to gather a heavier penalty compared to any other loan with a lower rate of interest. Also, paying a loan with high interest rate over a long period of time also means that you will be paying more money in the form of interest as opposed to one with a low rate of interest.
- The best way to ensure that you not only receive the funds that you need, but also are not burdened by the payment of the EMI is to find a loan with the lowest possible rate of interest. Since interest rates are directly proportional to the amount of EMI, a lower rate of interest will mean that your EMI will also be low. To find the best deal in the market, you will have to check and compare the rates offered by the banks and non-banking financing companies (NBFCs) and choose the one that best fits your needs as well as repayment capacity.
- Many a times banks offer additional discounts and schemes on loans to their loyal customers with a commendable credit history. Opting for such a loan can reduce your financial burden, thereby, helping you save big in the long run. Hence, it is a good idea to get a loan from the bank where you currently hold an account or have a standing relationship in any other way.
These are some ways that you can plan your EMIs so that you can manage your financial life well.