4 Ways to Handle the Burden of Your Home Loan

4 Ways to Handle the Burden of Your Home Loan

M_Id_422344_Home_loan_burdenThe decision has been made and you are on the verge of signing the dotted line for the home loan of your choice.

Very soon, you may move into the house of your dreams and begin to pay for it with a part of your savings and income every month.

Things may seem to be going well in the beginning, till you gradually realize there are several factors in terms of household expenses that you had not taken into consideration.

Expensive schools for the children, annual holidays to exotic locations, monthly entertainment and social life expenses, unanticipated medical or legal expenses and much more.

Suddenly the home loan is a much bigger burden than you anticipated.

This is a common scenario for many home loan borrowers. Often, people realize, a little too late that they may have bit off more than they can chew.

If you find yourself in a similar position or feel you may be headed that way, here are some tips to help you make a few better choices and adjustments to manage your home loan and other financial commitments better.

Before you take up a loan ask yourself these two questions:

  • How affordable is the EMI you are opting for? Double income families believe they can take on a higher EMI simply because they are eligible for it. Calculate monthly expenses and ensure that you can stick to your current lifestyle, while taking on the burden of the EMI.
  • Can you pay a bigger down payment? Banks grant loans on net pay and not on savings – this is a fact, many don’t take into account. It is important therefore to take on an EMI of a value that you are comfortable paying. Choose to pay a large down payment, even if it means holding on for a while till you save enough. If a larger down payment is not a possibility, consider a home that costs less.

After this, once you have signed up for a home loan and begin paying it, here are some tips that will help you manage your existing and potential financial commitments, along with your home loan.

  1. Reduce Extraneous Expenses: Create a ledger to analyze your monthly expenses apart from your home loan EMI. Note down every expense to help you understand where your income goes. From these details, you will be able to decipher where a reduction in expenses is possible. Do you eat expensive meals outside often? Is retail therapy something you indulge in often? Do you plan to take on another loan for a big ticket purchase? Cut down on unnecessary expenses and put away this money in an account to service your loan.
  2. Create a Home Loan Servicing Account: Managing your monthly expenses as well as your home loan from a single account can be tedious. You will easily lose track of where you money is going and will find yourself in a crunch often. Instead, you may choose to do what Mr. and Mrs. Rao did with their home loan.

Since a bank loan is provided on net pay of both applicants based on statements provided, they decided to split expenses clearly between their two accounts. Mr. Rao’s account, with the higher income, would service the home loan and other everyday expenses. Mrs. Rao’s account would then be used for savings and the creation of a contingency fund. This helped the couple prioritize and ensure that there was no confusion in terms of liabilities.

  1. Make Plans for an Emergency: The couple also decided on the creation of a corpus fund to finance any emergency. They did this by creating a fixed deposit account in the same bank that financed their loan. They also invested in home loan insurance for their loan. This is the kind of insurance that cover the family’s liability to pay EMIs should anything happen to the principal borrower(s). It ensures that all future EMIs will be paid and a family’s future is secure.
  2. Channel Income Wisely: Annual bonuses, sudden windfalls may make you a happy person. Don’t spend this money frivolously. Instead, stash it away to pay your home loan. Alternately, collect the amount and make a pre-payment on your home loan if you are eligible it. This will help bring down your EMI and consequently reduce the burden on your household expenses. Should you suddenly face a financial crisis, approach your bank for a step down EMI where you may reduce the amount payable for the duration of your crunch and then bring it back on track.

Working out your finances when taking on a home loan is about anticipating current and future needs. Having contingency funds to balance your finances is always a good idea.

Take-aways

  • Double income households tend to take on a larger EMI than they can handle, simply because they are eligible. Rethink this approach.
  • Pay a higher down payment and attempt to pre-pay parts of your loan where possible
  • Have separate accounts to finance the loan and your everyday expenses
  • Always have contingency funds in place to ensure household expenses are not disrupted when you pay a home loan
  • Invest in home loan insurance to safeguard your investment and your family
Repo Rate Revision to Make Home Loans Cheaper for Consumers

Repo Rate Revision to Make Home Loans Cheaper for Consumers

Home loan repo rate

Home loan repo rate

Earlier in January, when the Reserve Bank of India (RBI) announced a cut in the repo rate (rate at which the RBI lends money to commercial banks) by 0.25%, my friend was ecstatic. Looking to invest in a home in the coming fiscal year, he was excited to learn about the possibility of a lower interest rate on his home loan.

Last Wednesday, when the RBI announced repo rate revision by 0.25% basis points (BP) under the liquidity adjustment facility, it brought down interest rates from 7.75% to 7.5%. Now things look much better. Of course, he wanted to understand what this meant for him as a prospective home buyer.

Based on my discussions with Priya Sunder, co-founder of the award-winning wealth management company, PeakAlpha, this was the picture I was able to give my friend:

  • A reduction in repo rate technically means that banks are able to borrow at a lower rate and therefore in turn bring down interest rates at which they lend.
  • One thing that needs to be understood is the fact that reduction in repo rate takes a while to come into effect. This happens at 2 levels – home loan interest rate and deposit in bank interest rate. Banks may choose to implement the rate cut simultaneously on both products or only on a single one. It may take up to three months for it to feature in banks.
  • The reduction of repo rate by 0.25% basis points will not really make a difference to an individual and their loan rate right now, but it is significant in terms of things to come in the economy. This may be seen from the fact that there is already a second revision in rates and that too before the scheduled policy review meetings of the RBI.
  • For a person with a Rs. 10 lakh home loan, it simply means that there is a reduction of Rs. 150 on the EMI which may work out to Rs. 2000 a year in savings.
  • Considering all the market indicators right now, with inflation being under tight control, this double reduction in repo rates is definitely an indicator of better things to come.

With the cost of financing going down, the benefits will percolate down to the general consumer, allowing people like my friend to consider buying a home now.

Takeaways

  • Revision in repo rates means that home loans become cheaper to the prospective home buyer in terms of interest rates.
  • This may make a significant different to those with a larger home loan of Rs. 50 lakh and above.
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