Wednesday, 22 July 2015

Home loan - Plan your budget to manage EMIs better

Once you have availed a home loan, it needs to be repaid. The repayment is through EMIs. The EMIs are fixed at the inception, based on the loan amount, interest rate and tenure of the loan. The EMIs don't change unless one of the governing factors interest rate, tenure or the loan amount itself changes.

It is very important that one plans properly, in advance, on how the EMIs will be paid. Non-payment of EMIs can lead to serious consequences. Delay in payment of EMIs or non-payment will entail a heavy penalty. A bank may recall its loan or enforce the security given if the EMIs remain unpaid for long. At the same time, the CIBIL credit score of the borrower may be adversely impacted, closing all doors for future loans.

So, it is of utmost importance that a borrower plans properly, in advance, on how he proposes to repay the loan through the EMIs. Basically, this will entail simple maths and charting out simple cash flows.

One should prepare simple cash flows listing the funds inflows and outflows. Firstly, a broad plan should be prepared, followed by a detailed month-wise plan. In fact, this exercise should be done even before the borrowing decision is taken. First, you should find out the monthly surplus available and then using that as the basis, you can calculate how much funds you should borrow, rather than going the other way around. The challenge is that you have to plan from a long-term perspective rather than a short-term one and as such need to factor in many assumptions.

The amount shown as balance can be used for the EMIs towards the home loan repayment. In case rent is paid, he can pay Rs 3 lakhs per annum as home loan EMIs. In case he shifts to the new flat, he will save on rent, which increases the EMI payment capacity drastically to about Rs 6-8 lakhs per annum on an average.

As can be seen, with Rs 3 lakhs surplus, he can pay an EMI of Rs 25,000. If he goes in for a 10-year loan, he can borrow Rs 19 lakhs. The EMI at 10 percent will come to Rs 25,109.

With Rs 6 lakhs per annum surplus, he can pay an EMI of Rs 50,000 and as such can borrow about Rs 40 lakhs for 10 years.

These amounts can be further increased, if he can save on some expenses.One also needs to provide for contingencies and plan funds accordingly. For example, higher studies, marriage, medical expenses etc also may need to be taken into account while preparing a budget. This will help the borrower ensure he does not go in for excessive borrowings more than what he can service.

Once a broad plan is made, one may break it up into monthly fund inflows and outflows. As all times of the year are not same, one can plan accordingly and start preparing a contingency fund for those times of the year when funds required are more and save more during months when the fund requirement is low.

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