If you are either currently a borrower of a home loan, or if you are intending to get a home loan, then you must be aware that home loan instalments tend to be a huge cost that you incur every month, for as long as you are repaying the loan amount along with the interest amount. Therefore, these home loan EMI deduction calls for especial management so that your financial life doesn’t go into a vicious spiral of debt and repayment. Read on, if you want to know more!
As populations grow, cities grow as a consequence thereof. Both the government and the free market therefore strive to cope up with the housing issues and the demand of hundreds and thousands of perspective home buyers. The purchasing power of these consumers is heterogeneous, as much as the the class background they hail from; some might opt for a loan of 6 lakhs while others might want a lone of 1 crore rupees, or more. Whatever the requirements, lenders like banks and housing finance corporations (HFCs) do their best to serve them. The loan amount is disbursed to the borrowers as and when required, and it is repaid by the borrower to the lender by the means of Equated Monthly Instalments (EMIs).
Once this cycle of paying EMIs begin, you have to necessarily cut down on your monthly expenditure to repay the loan as any kind of default in paying the EMI can lead to bitter results and can even adversely affect your credit score. Instead, it is rather preferable to plan out your home loan monthly instalment in a manner that doesn’t pose any crisis in your household. However, there are a plethora of factors to consider in planning out this plan. Some of them have been listed below:
- Earnings: Probably the most important factor that would affect your ability to pay your EMI would be your income. If you are employed in a stable position, within a stable industry, you and your lender can reasonably expect that your earnings are liable to increase over a period of time. Therefore, your EMI could be kept on the higher side of things, and initially it would not be a welcome sight as it would inevitably make a sorry state of affairs for your bank balance. But given a few years’ time, your EMI would cease to be a burden at all. If you’re not indebted to another loan scheme, banks tend to keep around 40% to 45% of your income as your EMI amount. However, if it seems you are going to remain financially stable for a long time to come, you can easily opt for heavier EMIs early on the repayment period. Ensure that even when you’re paying your EMIs, monthly expenditures on essential goods are not affected.
- Expenditure: You should not only consider your current rate of expenses in calculating your monthly EMI, you should also include the increased expenditure that would be incurred as your loan term would progress. Your present and future expenditure like family expenses, possible medical expenses, expenses incurred on kids and on lifestyle choices and personal expenses should be considered while you and your lender decide on an EMI amount. Your spending should also remain unaffected even if inflation affects the economy. So be careful and don’t take any risks on deciding an EMI amount.
- Repayment Capacity: As it is evident, your ability to repay depends a lot on how much you earn and how much you spend, etc. The bank’s objective is to ensure you are able to repay your loan in time, while calculating your EMI amount. Only on that basis are your loan eligibility and repayment capacity calculated. Depending on your repayment capacity, your EMI would be accordingly decided as well.
- Age: Age is, again, one of the most important factors for deciding on your final EMI amount, and your age also influences your loan’s rate of interest. In any case, starting on early with your home loan is highly beneficial since an increased salary would make your EMI feel less burdensome, over the years. Further, with a young age, you can afford to pay heavier EMIs in order to make the EMI payments later on more weightless.
- Standard of Living: Once you start giving out your EMIs, your lifestyle chpoices are affected. From food habits to travelling, everything would grind itself to a halt since every month you’re paying a significant portion of your salary as the EMI.
- Loan Tenure: If you’re someone who doesn’t want the loan lasting for decades, the best thing you can do is to pay heavy EMIs early on into the loan tenure so that the loan period shortens out; or you can opt for a long term loan that spreads itself across the years and where you can pay your EMIs slowly and steadily.
- Rate of Interest: Interestingly, the rate of interest on your loan shall not remain constant throughout the entire tenure, especially if you have opted for a MCLR linked home loan. These days, fixed rate loans have gone out of vogue, and it is the MCLR that dominates the stage. Compared to the MCLR linked home loans, fixed rate home loan interests tend to be on the higher end of the register. However, the main issue with MCLR loans lies in the fact that since these are floating rate loans, the bank has the right to change the rate of interest at any given time. Thus your EMI amount would vary over the years, everytime the bank decides to change the rate of interest on your loan.
Hence these are some of the many considerations that you must make while planning your monthly home loan instalment’s amount. It is essential that you do so, else you risk yourself spiralling into an endless circle of debt and repayment that becomes almost impossible to come out from. Plan and execute your plan accordingly, and you won’t have no issues when it comes to paying back your home loan to the bank.