Suppose you have gotten your home loan sanctioned and you’re just a few steps away from purchasing your new house. Now that you have crossed the primary hurdle, it’s time to talk about the larger fence —your home loan equated monthly installment (EMI). These payouts would claim a major chunk of your household income every month, and dealing with them, especially if you haven’t managed a major debt commitment before, can be a tricky affair.
Things can get more challenging if your repayment plans get obstructed by an unanticipated life development like one of the earning members losing a job – something that might stress your finances further. Then there are others who don’t stick to a budget and go for a house which they can’t really afford. They obviously struggle to manage other important financial commitments after paying the expensive EMIs or are forced to drain their emergency fund which, in turn, leaves them extremely vulnerable to life’s vagaries.
As such, financial discipline, a farsighted approach and money management skills are extremely important to manage your home loan EMIs effectively. Here are some tips which you’ll find very helpful.
1. Make lump sum part-payments against your loan
This will substantially bring down the principal outstanding as well as the tenure. You should ideally target to make partial payments in a lump sum during the early stages of your loan when the principal amount remaining is quite steep.
What’s more, banks and other financial institutions don’t charge any penalty for partial prepayments. However, some banks may have a slab for the number of partial payments you can make against your loan. So, check with your bank and plan your bulk part-prepayments accordingly.
Pro-tip: Make use of windfalls
Whatever windfalls come into your life in the form of festival bonus or policy maturity amount, utilise the amount to make partial prepayments.
2. Create a separate fund for EMIs
To be precise, save as much as you can and create a fund dedicated to your home loan EMIs. You can also utilise some of your investment-related accounts to pull funds. However, ensure that you are withdrawing your funds only from those accounts that are not giving you enough returns.
Pro-tip: Go for short-term investments
Before applying for your loan, put your money in a short-term investment plan. Plan it meticulously, so that you receive the maturity amount right on time, as in when or before your loan gets sanctioned. You can use the amount to build funds, which you can use to pay your EMI. Another tip for those who are yet to embark upon their loan journey is to calculate roughly how much their loan EMIs will cost and save up that much amount every month. This will give them an idea of how they’ll be positioned financially when the home loan EMIs actually begin and instil much-needed financial discipline. The saved corpus can be used for any of the non-loan charges like registration or interior decoration, or as a lump sum part payment when the loan begins.
3. Go for higher EMI
A higher monthly instalment may look scary, but it helps you save on the interest bit. If you are opting for a long-term loan, say 30 years, though your monthly interest will be lower than a 20-year tenure loan, you will be paying much more as interest. So, try to repay more as instalments every month. Though the burden of paying more will be there, you will be saving more in the long run.
Pro-tip: Make use of home loan EMI calculators
Use an online home loan EMI calculator to compare your monthly obligations. Vary the loan tenure and see which timeline won’t harm your finances, but instead, will let you save more on the interest.
4. Opt for A balance transfer to cut down on the interest
Suppose you have already taken a home loan and have been paying EMI diligently for some time. After three years, you feel that the interest charged is higher than other banks. In such a situation, you can transfer your outstanding loan amount from your current bank to another bank of your choice, provided that bank offers transfer of loans. With a reduced interest rate, your monthly EMI will also come down considerably.
Pro-tip: Missed payments for loan balance transfers are a strict no-no
Never default on balance transfer loans. The penalties are steep and may cause irreparable damage to your credit score. Also, compare interest rates offered by different banks under their respective balance transfer plans before switching.
5. Down pay more to reduce the burden of loan
Most banks offer 75 percent to 90 percent of the total cost of the property as financing depending on the borrower’s credit score and income. So, if you plan to pay more as down payment, you don’t have to borrow a huge amount from the bank. That means, your EMI won’t be that steep either (depending on the loan tenure).
Pro-tip: Save more and pay more
Start saving early so that you can pay more as a down payment. It will not only ease the burden of the loan from your shoulders but will also help you enjoy lower monthly repayments. There’s a popular rule of thumb that you should ideally aim to save up at least 30% of the property you wish to buy, even if the loan covers 80-90% of the property value. Doing so ensures you’re better prepared for a range of non-loan expenses like down payment, registration, interior decoration, title deed, etc. It’ll be better if you can save up even more, as that would bring down your EMIs.
6. Cost-cutting may not be enough. Work towards increasing your income
You’ll have to exercise frugality if your home loan EMIs are high and your income is static. But cutting corners may not be enough especially when your family’s financial commitments increase as time passes. As such, you should constantly be on the lookout to expand your income pool to be left with more room to accommodate all your expenses and meet your savings and investment targets. The steps you can take include upskilling to land a better-paying promotion or a lucrative job opportunity, freelancing or tutoring online, or even starting a YouTube channel to showcase your expertise!
Pro-tip: Share financial responsibilities with earning members in your family
If you’re finding it difficult to manage all the expenses on your own, you can always seek the help of other earning family members to share a few financial commitments. Even if they take charge of smaller commitments like mobile and internet bills, it’ll still make a huge difference.
7. Ensure your safety nets don’t get torn
It’s not uncommon for people to dig into their emergency fund (and never replenish it again) or discontinue their health insurance premiums when they struggle with their home loan EMIs. These can be extremely dangerous steps as a medical or a family emergency will drain their finances, which in turn will make it doubly difficult for them to manage their EMIs. As such, ensure your important financial commitments like insurance premiums and emergency fund are not impacted during the loan tenure.
Adhil Shetty is the CEO of BankBazaar.com Read Adhil Shetty's columns