It doesn’t matter that if you are an existing home loan borrower or even if you are planning to take one soon. But if the answer to the first line is yes, then the following article can be a great help. It is important for you know that home loan monthly installments hold a major part as your monthly financial earning. The home loan EMI’s has to be managed properly so that they don’t cause any dent in your financial life. To know more how you can plan for your home loan EMIs, continue to read:
With the current development in urban areas, the country’s market is trying hard to serve the housing needs of hundreds & millions of prospective and existing home buyers. There is a wide range if home buyers that are spread over the wide range who wants to secure a home loan for as low as 6 lakhs Rupees to as high as 1 Crore Rupees and may be more. The Banks/ NBFC’s try to serve as per the home buyer’s need. The banks/ NBFC’s/ HFCs disburse the loan amount to the borrowers as and when required by the builders/ developers/ self and repaid by the borrowers through Equated Monthly Installments (EMIs).
Once the borrower is trapped in the vicious circle of home loan EMI’s, he has to cut down on the monthly expenses to repay the loan as any non-repayment or default in EMI’s may lead to harsh consequences and can adversely affect your credit score. So, it is better to plan your home loan monthly installments (Home Loan EMIs) in advance in a way that they do not cause any financial crisis to your household financial chart. However, there are a lot of factors that need to be considered while planning a Home Loan EMI that can be a stepping stone for you in future situations, some of them include:
Your present day, take-home earning is the most significant factor that helps to decide your home loan monthly installment amount. If the borrower is in a stable job in a relatively stable industry, the Bank/ NBFC and even you can safely predict that with time your earnings will increase in an appropriate graph. Thus, the EMI can be kept on a higher side. This might affect the bank balance initially but in a few years down the line the EMIs will not seem to be a burden at all. If the borrower is not already serving any other loan, the banks/ NBFC’s usually are inclined to keep 40% – 45% of your monthly earnings as your home loan EMI. However, if it seems that the borrower will remain financially stable for a long period of time then the borrower can easily go ahead and service heavy EMIs early-on in your loan tenure. It is important to take a note that the EMIs don’t affect your current investments and expenditures. Since banks usually consider 40-45% of your income while calculating your EMI payments, the amount that lets you make at least 15% savings from your monthly earning is considered ideal.
The salary and changes in it are always uncertain. Moreover, if the borrower is a businessperson or a self-employed professional then uncertainty looms over all the time over your monthly earnings. However, if your career looks stable to the Bank / NBFC presume that your earnings will increase over time, so they prepare an EMI schedule which asks for 40 – 45% of your earnings.
The borrower should not only count-in the current expenses while figuring out the EMI but also the increased spending should be calculated as your loan term progresses. The current and potential future expenses such as family expenses, possible medical expenses, kids’ expenses, lifestyle expenses, personal expenses etc carry an equal importance and should be calculated -in while you and the Bank/ NBFC decide the EMI’s. The dedicated EMI amount should remain unaffected by any sweep in inflation over the years. So, play safe while deciding your home loan EMI to keep paying them on-time.
As mentioned before that the repayment capacity of the borrower depends on the income, expenses etc. Bank/ NBFCs objective is to calculate your home loan installment which is comfortable enough for the borrower to repay the loan on-time. The loan eligibility and repayment capacity is calculated accordingly. The EMI amount is decided by determining the repayment capacity of the borrower. Repayment capacity is calculated through the monthly expenses /surplus income which a borrower can easily take out of his/her monthly income. Monthly expenses and surplus income can be calculated by many factors like the comprehensive monthly income/surplus excluding your monthly expenses, spouse’s earnings, income stability, assets and liabilities etc.
Age is certainly an important factor to plan your EMIs. The borrower’s age influences the loan’s rate of interest. If the borrower is in its 20s’ while starting a loan, then you can always afford to pay heavy EMIs and later with more responsibilities in life, EMIs feel less burdensome with an increase in salary. However, this may not be right if the borrower start a loan in its 30s’. When the loan is borrower later in life, it is difficult to balance it well with the current expenditures. Also, if the loan is borrowed early years of your life then the borrower have an option of going debt-free early. However in this case, in the initial years a major part of the salary goes towards the EMIs so there may not be desired savings.
The lifestyle, choices and other decisions gets affected once the EMIs come into picture. Everything right from dining outside to the travel is hampered since every month a huge chunk goes out of your bank account towards the repayment of the loan. This is why it is important to fix an EMI which can be served well while also not cutting much deeper into your lifestyle.
If the borrower wants to pay big EMIs and finish the loan as early as possible so that the loan doesn’t run for decades, then the borrower has to take out a major part of the salary as an EMI. However if this idea doesn’t fits well in your present scenario, the borrower can always have a loan tenure of 15 to 20 years and pay out the loan EMIs slowly and steadily. If the borrower is comfortable enough to carve out regular EMIs from the salary for decades, then choosing a long tenure for your loan is a best option for you. It’s a human tendency that when people find their ideal home they stretch their budget or take a home loan that burdens their budget. However, in both cases, things should be planned and well managed in advance.
Rate of Interest (RoI) of your loan shall not remain the same throughout the loan tenure even if the borrower has chosen a MCLR linked home loan. These days MCLR-linked home loans are preferred rather than fixed rate loans. MCLR-linked home loans have significantly lower RoI when compared to Fixed rate home loans. However, MCLR linked loans are floating rate loans which means that the interest rate on these loans will change when the bank chooses to change it. Thus, the EMI amount over the years will vary every time the RoI is changed. Similarly while planning your EMI amount and calculating the tenure you should be aware that in future you may have to pay an increased EMI or pay the same EMI but for an increased tenure.
Overall Considerations:The borrower should consider the present income, lifestyle, increase/decrease in future income, ability to switch jobs, the increments, the career choices in upcoming years, goals, future expenses and retirement plans before planning your Home loan EMIs.
Also an increase or decrease in your EMI amount invites charges such as prepayment charges by the banks. That is why it is suggested by Banks/ NBFC’s to keep the EMIs large initially – it may dig deep into your pocket for the initial few years but will help you sustain in future years. Moreover, as mentioned before the Bank/ NBFC do not keep the EMI’s above 40% – 45 % of your current in-hand earnings.
However since the expenses really never go away and keep on adding at every stage of life such as a birth of a child, their studies, a new car/home, medical expense, parents medicals and other miscellaneous expenses, they can affect your home loan EMIs. Although, after leaving your 50 % – 60 % salary alone to serve your commitments, the financial institution doesn’t know how you plan to manage your EMIs. It is you who has to decide whether you will be able to meet your commitments with the 50% of your salary or not.
Most importantly, the borrower also has to take care of investments. The investments will also grow as with your salary increase. Thus, the EMI shall be calculated accordingly: Let’s say the borrower wants to invest 30% of the in-hand monthly earnings on investments and other short term, low cost and high-priority goals and the monthly expenses are 30% of the salary, then the borrower can keep 30% of the monthly earnings as an EMI and the rest, 10% can be buffered for uncertain and miscellaneous expenses.
As we said that it is important to invest as compounding money works for you rather than the bank. So to offset the damage done to your savings by the loan EMIs, you should invest. If the home loan’s EMIs seems to be affecting your expenses then your loan eligibility will be reduced accordingly. However, the Bank/ NBFC’s and other financial institutions tend to calculate the EMIs and loan tenure in such a manner that it doesn’t affect your monthly expenses.
It is suggested by the experts to only buy a house after you have a job certainty and stability in life. Set a goal and start saving. Also ensure to make regular payments to maintain the credit scores. Borrowing a loan later in your life will award you much clarity when to borrow the loan and your EMIs will be sorted. With a higher salary paying EMIs are affordable and the loan tenure will also be your advantage. However, you might suffer the possibility of not owning a home for a long time if you take a home loan later in life.