Home loan is undoubtedly one of the biggest investments of one’s life. What sets it apart is that you can repay the instalments over an extended tenure that cold even stretch to 30 years. Therefore, one needs to exert enough caution with regard to EMIs (equated monthly instalments), as it takes a considerable amount of your monthly income in the initial stages. The following are the important factors to consider when it comes to managing your EMIs judiciously:
- Your Earnings: this is the most vital aspect that determines your EMI. Banks usually look for 40-45% of your monthly earnings as the house loan EMI, given that you are not servicing any other loan. The concept of the EMI is such that you service the interest and the principal portion of your home loan every month. Ideally, your EMI should allow you to save at least 15% of your monthly earnings after catering to all expenses, including your EMI. An online housing loan EMI calculator will also give you a similar estimate. In case you are a self-employed professional or a business person, your monthly income can fluctuate, and hence, it is advisable to take into consideration the average of the 12 months’ income and set your EMI accordingly.
- Your Expenditure: just as your income is expected to increase over the course of time, your expenses will also not remain the same in the long run. You have to factor in the increased spending which includes expenses pertaining to medical, kids’ expenses, lifestyle expenses, and so on. The inflation factor should also not be ignored, more so if your income does not increase in tune with the inflation levels. Therefore, it is always a good idea to play it safe and settle for a lower EMI. After all, you will anyway have the option to pay more than your EMI amount every month.
- Your Repayment Capacity: banks generally go by the concept of take-home pay norms while processing home loan applications. Usually, according to the banks’ stipulation, the take-home pay should be around 40-50% after considering your loan instalments including the proposed home loan EMI. An essential factor in deciding your home loan eligibility, this take-home pay concept explains why people include the spouse’s income as it provides the required cushioning.
- Your Age: banks follow 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 with the benefit of pension facility. Alternatively, the banks calculate the loan tenure in a way that coincides with your retirement age.
- Your Standard of Living: the home loan is such a product that you have to live with the EMI for an extended period. Thus, you have to bring the necessary changes to your lifestyle accordingly. Fix up your EMI in a manner that allows you to service the loan without disrupting your regular standard of living.
- Your Loan Tenure: you will surely not like to live with the burden of an EMI all your life. People usually prefer to get rid of their EMIs as early as possible. It can entail earmarking a major part of your income for servicing higher EMIs. If you cannot afford that, it is advisable to settle for longer tenures, which will reduce your EMI amount. However, do note that it will also increase the overall outlay, and you will end up paying a considerable amount over the entire tenure of the home loan.
- The Rate of Interest: you do not have any control over this factor, unless you settle for the fixed rate of interest. However, banks stipulate a substantially higher fixed interest rate as compared to the floating Marginal Cost of Funds Based Lending Rate (MCLR) linked home loans. Theoretically speaking, any change in the housing loan interest rate should have an effect on your EMI. However, many banks prefer to stretch the repayment period (if the rates increase), thereby keeping the EMI constant. You can opt to pay a floating EMI if you would prefer to keep your tenure constant.
Besides, it should also be noted that there are a number of external factors that determine your repayment capacity, which should be considered when it comes to managing your home loan EMIs. These include, lifestyle expenses, changes in your income or your employment status, your annual increments, your future expenditures, retirement plans, and so on.