Purchasing a home and moving into it is a dream come true for many individuals. Almost all home purchases today are funded by a home loan. This means payment of hefty amount as down payment as well as monthly outflow in the form of Equated Monthly Installments (EMI). Even if you can actually manage to pay the down payment by collecting from various sources, the monthly EMI is a new strain on your finances.
First and foremost, remember that the amount you pay as an EMI every month depends on the loan amount you borrow, which again depends on the down payment you made for your house. Nowadays, more and more borrowers are families where both the husband and wife are working. As a result, loan eligibility is more, and people think they can afford to borrow more simply because they are eligible to do so. However, remember that banks grant you loan based on the net take home pay, and not based on what you save. Hence you must borrow only to the extent you can comfortably repay. This means, to buy the house of the same value, you should increase the amount you pay as the down payment. Wait till you can save to pay a considerable amount as down payment, so that your borrowing is reduced. If you still feel that this is a stretch, settle for a house with a lower budget.
Assuming you went ahead and bought a house by shelling out the minimum amount as down payment, and by opting for a large loan, you are faced with the predicament of high EMIs. How can you meet your EMIs such that your financial position is comfortable? Here are a few ways to plan your cash flows such that your EMIs are managed-
As a first step, instead of cursing yourself for having purchased the house without doing the math, be thankful that your monthly income is going towards servicing a loan for an asset which has the potential to appreciate, rather than spending on unnecessary items.
Next, look at how you can streamline the process you follow while you service your home loan. You can start off by analyzing where you spend your salary other than on the EMI. Look at areas where you can cut back expenses, especially on the discretionary areas. For instance, if you find out that expenses on eating out comes to Rs.5000 per month, look at how you can reduce this – either by reducing the number of outings or cooking attractive options at home which will consume much less money.
Have separate accounts for servicing the loan and for savings. When you route all expenses through one savings bank account, it becomes difficult to keep track of the various debits in the account. Further, if both you and your spouse are working, then there will be income credits in both your salary accounts. Discuss and take a joint decision before-hand on the expense heads which will be debited from your account and your spouse’s account. For example, you can decide to pay for all utility bills and household expenses from your account, while your spouse’s income can be used for meeting lifestyle expenses. When you have different accounts for tracking different expenses, it becomes more disciplined and easier to control expenses. This will also allow you to track patterns of your expenses on the same head in different months. Spending less means saving more, which automatically makes your cash flow position comfortable.
You should always maintain a contingency fund which will help you pay your EMIs even in cases of emergencies. Remember that when you borrow a home loan, it is your duty to service the loan under any circumstance, come what may. A failure to service your EMIs promptly will mark you as a defaulter, and as a result cause a dip in your credit score. Your contingency fund should be able to service atleast 3 EMIs comfortably, if there is an emergency. Start building this corpus gradually in small instalments when you begin your home loan.
If you have any excess savings during the month, invest in good quality mutual funds, which will give you good returns over the long term. If you build a healthy corpus at the end of 2 or 3 years, you can part prepay your home loan to bring down the EMI amount or tenure.
Whenever you receive any windfalls or sudden gains, use it wisely by part prepaying your loan, instead of spending it on purchasing unnecessary luxuries. When you part prepay your loan, you can either choose to reduce the overall tenure of the loan, or bring down the EMI amount. If monthly cash flow position is really tight, then you can choose to cut down the EMI till your cash flows improve. However, this strategy might not be as useful as bringing down the overall tenure of the loan. This will reduce the total interest outflow.
Some banks offer you a step-down EMI option, wherein you can bring down your EMI amount temporarily, till your income and cash flows stabilise, and then increase it back to the usual level using a step-up EMI option.
The above are some ways of how you can plan your EMIs to lead a comfortable financial life.