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Affordable Housing Finance

5 tips to financially plan your home loan

15 August, 2017      New Home Buyers

 

How should you arrive at how much home loan you should avail? Taking a home loan should be a conscious process and a well-planned one. It is virtually a commitment for life often, or at least for a long period of time.

 

How should you arrive at how much home loan you should avail? Taking a home loan should be a conscious process and a well-planned one. It is virtually a commitment for life often, or at least for a long period of time. You need to plan the present as well as future estimated cash flows, the likely expenditures you may incur, what type of loan to be picked, the optional expenditures which may be curtailed or deferred, the investments you have to make and so on.

A house is an asset for life. And as such needs to be planned carefully.

Estimate income

First, list out your monthly sources of incomes these can be salary, rent, dividend etc. In case both spouses are working, you can club both the incomes. The expected escalation in the total income should also be considered. You also need to consider the yearly income from investments such as fixed deposits, and possibly bonus. This estimation should be made for the lifecycle of the loan, and more rigorously for the immediate 3-5 years. This way, you can arrive at the cash available over the period.

Estimate expenditure

Then comes the expenses which you may incur. These include household expenses, essential investments, tax saving investments, existing EMIs, school fee, medical expenses, insurance premiums etc. You may also consider likely expenditures on marriage of children or their higher education and so on.

It is good if you put an estimated timeframe to these expenses. You can also factor in any planned sale of assets such as a property, shares etc. Considering these incomes and expenses, you can arrive at a net figure that is at your disposal. This will indicate the amount of EMI that you can pay comfortably and use EMI  Calculator like https://www.arthfc.com/emi-calculator.html to get an estimation of the EMI going to be built against your Loan.

Contingency fund

In addition, you should always maintain a contingency fund that will help you pay your EMIs in case of emergencies. Once you take a home loan, it is your duty to repay the loan along with the interest. A failure to service your EMIs promptly will mark you as a defaulter, and impact your credit score adversely.

You should build up a contingency fund that should be able to service at least six EMIs comfortably, in case of emergency, along with meeting other essential expenses.

Timing

This is another very important factor. How the time of receipts and payments coincides is very important. Any mismatch on that front can be disastrous.

For example, you may be required to pay Rs 50,000 in EMIs monthly. If you expect to use your bonus of Rs 5 lakhs towards payment of some EMIs, but the bonus is available after the EMIs have commenced, this timing mismatch may force you to use your emergency funds, sell some assets, or borrow. 

So, although overall you may have the funds, you may not have them when required. This can also happen in case you want to use the funds from sale of a property to pay the EMIs, but are unable to sell the property in time.

Prepayment saves interest cost

In order to save on the interest cost, you can consider using any excess cash in hand to partly prepay the home loan. This will accelerate the home loan repayment process. When you partly prepay your loan, you can either choose to reduce the tenure of the loan, or bring down the EMI amount. 

It is also important to check what type of loan is suitable for you before visiting any financial institution. Just give a look at the product section of- https://www.arthfc.com/