A Home Loan is one of the most significant investments in life. The unique aspect of the Home Loan is that you repay the instalments over an extended tenure that could even stretch to 30 years. Therefore, you should be careful with your EMI (Equated Monthly Instalment) payment. It takes a significant amount out of your monthly income in the initial stages. Hence, it becomes essential to manage your EMI. Let us see the eight things to consider for managing your Home Loan EMIs correctly.
Your earning is the most significant factor that decides your EMI. Banks usually look for 40% to 45% of your monthly earnings as the Home Loan EMI, if you are not servicing any other loan. It might seem to be a significant amount initially. However, with the passage of time, your income may increase. Hence, the EMI will not be a burden on your shoulders. If you have a steady job in a stable industry, you can go for a higher EMI as your salary is bound to increase in the future.
What is the ideal EMI? The concept of the EMI is such that you service the interest and the principal portion of your Home Loan every month. Therefore, your prospective EMI should be more than the interest charged on your Home Loan every month. In the initial stages, the servicing of the principal component will be less. The ideal EMI is one that allows you to save a minimum of 15% of your monthly earnings after catering to all expenses including your EMIs. If you are a self-employed individual or a business person, your monthly income can fluctuate. It is better to take the average of the 12 months income and set your EMI accordingly.
Just as your income is not going to be the same in the future, you can expect your expenditure to vary in the long term. You have to consider the increased spending you have to do in the future. Some of the additional expenses include medical expenses, kids’ expenses, lifestyle expenses, and so on. You should also consider the inflation factor, primarily if your income does not increase in tune with the inflation levels. Therefore, it is better to play it safe and settle for a lower EMI. You always have the option to pay more than your EMI amount every month.
Banks have the concept of take-home pay norms while processing Home Loan applications. Usually, banks stipulate the take-home pay be around 40% to 50% after considering your loan instalments including the proposed Home Loan EMI. The take-home pay concept is an essential factor in deciding your loan eligibility. It explains why people include the income of the spouse as it provides the required cushioning. Nowadays, specific banks have products having step-up EMI products, where your EMI is less in the initial period and increases according to the prospective rise in your income levels. It is the best Home Loan EMI option, especially for the younger generation that goes in for a Home Loan early in their career.
Banks have a stipulation of maximum age at the maturity of the loan. Usually, it is around 70 years for self-employed professionals, non-professionals, business persons, and salaried persons having the benefit of pension facility. Otherwise, the banks calculate the loan tenure in such a way that it coincides with your retirement age. It implies that your EMI will be more if you avail the housing loan at an older age. Borrowers in the 20s can afford to pay heavy EMIs in the initial stages. They can maintain the same in the future as well because of the increase in the salary levels. You cannot say the same about the borrower in the 30s and 40s.
The Home Loan is such a product that you have to live with the EMI for an extended period. Hence, you have to make adjustments to your standard of living. You should fix up your EMI in a manner that enables you to service it without cutting deep into your lifestyle.
No one likes to live with an EMI burden all their lives. People tend to get rid of their EMIs quickly. It can entail earmarking a significant part of your income for servicing higher EMIs. In case you cannot afford the luxury, you can always settle for the longer tenures. A longer tenure will reduce your EMI amount, but will substantially increase the overall outlay. You end up paying a considerable amount over the entire tenure of the Home Loan.
You do not have any control over the rate of interest unless you opt for the fixed rate of interest. However, the banks stipulate a substantially higher fixed rate of interest in comparison to the floating Marginal Cost of Funds Based Lending Rate (MCLR) linked Home Loans. Theoretically, any change in the rate of interest should affect your EMI. However, many banks prefer to elongate the repayment period (if the rates increase) thereby keeping the EMI constant. You can opt to pay a floating EMI if you desire to keep your tenure constant.
Many external factors determine your repayment capacity. It could include lifestyle expenses, increase or decrease in your income, a change in your employment status, your annual increments, your future expenditures, retirement plans, and so on. Consider all these factors while planning your EMIs.
It is advisable to keep your EMI in the range of 30% to 35% of the monthly income. You still have the option of paying more than your EMI amount. Most of the banks do not charge any pre-payment penalties on their floating-rate Home Loans. Increase your EMIs to match with the increase in your income. You would end up repaying your Home Loan much earlier than you expect to do so in the ordinary course.
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