Are you planning to apply for a home loan or already paying EMIs on one? If your answer to either of the questions is a yes, you would need to invest some time in planning your finances. Before you apply for home loan, you need to carefully evaluate your ability to repay so that the EMIs don’t hurt your budget.
There are a bunch of factors that collectively impact the way lenders perceive your repayment ability. Weighing these factors can help you avoid any pitfalls in planning EMIs while applying for a home loan.
1. Assess your income
If you have a stable source of income, lenders generally tend to believe that you would be able to repay the loan. In case you have no other existing debt at the moment, your bank would advise you to pay around 40% of your monthly income towards EMIs.
2. Scan your expenditure
Based on your standard of living, anticipate various expenses that you’d incur every month like your children’s education, medical expenses, personal expenses, etc. Also, try to incorporate emergency needs that could arise and affect your budget. Don’t commit yourself to a high EMI only to find yourself struggling with the burden later.
3. Separate accounts for loan and savings
If both you as well as your spouse are working individuals, you’ll get income credits in both the salary accounts. Routing all expenses through one account can make it difficult to track all the activity in your account. Having separate accounts for servicing loans and savings can make things easier to manage. The idea may seem complicated at first glance, but the benefits far outweigh the hassle.
4. Create a contingency fund
Regardless of how well you plan your expenses, eventualities may occur. Failing to pay your housing loan EMIs for even a month can make you a defaulter and hurt your credit score. Therefore, maintain a contingency fund that can cover at least three EMIs in a row if an emergency were to occur. Ideally, you should start building this fund in small instalments as soon as your loan is approved.
5. Prepay your loan
You can put your extra savings of the month in a mutual fund that offers you good returns over the long-term. If you can save a significant amount of money at the end of three to four years, you can prepay your balance loan amount partly.
Here, you will be presented with two options. You can either reduce the EMI amount if your monthly income drops for a while or reduce the loan tenure.
Tata Capital’s home loan makes things convenient for you with its home loan EMI calculator that allows you to do these complex calculations at the click of a few buttons. All you need to do is enter the loan amount, tenure, and interest rate, and the home loan calculator comes up with an accurate EMI estimation in a matter of seconds.