One of the most significant investments in life is getting a home loan. It gives you an opportunity to repay your loan to a period of up to thirty years. Thus, you need to be extremely careful with your Equated Monthly Installment (EMI) payment.
In the initial stages, it consumes a huge sum from your monthly pay. Therefore, it is essential to learn how you can manage your EMI. Here are some of the things that will assist you in managing your EMI correctly;
The most significant factor that determines the EMI is your earnings. Financial institutions normally want 40 to 45% of the monthly earning to be your home loan EMI. However, this is the case if you are not servicing another loan.
Initially, this amount may appear to be significant. However, over time, your monthly income may increase. It means that the EMI will not continue to be a burden in your shoulders.
If you are having a steady job, you may choose a higher EMI because your salary will increase over time. The EMI allows you to settle the interest and a portion of the principal home loan every month.
Therefore, the prospective EMI has to be higher than the monthly interest that is charged in your loan. In the initial months, the principal component servicing will be less.
The ideal EMI will allow you to save at least 15% of the monthly income after you take care of all your expenditures including the EMIs. If you are a business group or self-employed individual, the monthly income may fluctuate.
The best practice is taking an average income of 12 months and use it to set your EMI. You may also want to check on the cost of insurance protection for home loans as you set this figure.
Like income, your total monthly expenses will also increase over time. You have to consider the increases in expenditure in the future. The additional expenses may include lifestyle expenses, kid’s expenses, and medical expenditure among others.
The other crucial factor is inflation more so if the increase in your income is not proportionate to the levels of inflation. It is always a wise move to play safe by settling for a lower EMI. You have an option of paying an amount that is higher than the EMI every month.
Your Repayment Capacity
Lenders pay close attention to the take home amount when processing home loans. Most banks want you to take home approximately 40% to 50%. This figure is after you include the proposed home loan EMI and insurance protection for home loans.
The take-home amount is a crucial eligibility criteria. You also need to include the income of your spouse to provide cushioning. Some banks in the region have step-up EMI products.
In this case, you will have a small EMI in the initial days and the figure increases as per your prospective rises in income. This EMI home loan option is the best especially for the young generation. It will motivate you to take a home loan in the early days of your career.
Lenders stipulate the maximum age for the maturity of your home loan. It all depends with your career but the average age is 70 years. Most banks will calculate the loan tenure so that it can coincide with the retirement age.
Therefore, you will have a higher EMI if you are availing the home loan at an older age. Getting this facility early in life is always the best option. Borrowers who are in their 20’s can afford higher EMIs during the initial stages.
These borrowers can maintain the same in future as their salaries continue to increase. The same case may not apply to borrowers who are in their 30’s or 40’s.
Your Living Standard
With the home loan, you should be ready to live with the EMI for an extended period. The implication is that you will be adjusting your living standards. Fix the EMI in such a way that it allows you to service the home loan without having to cut so much in your lifestyle.
Your Loan Tenure
No one would like to live with the burden of the EMI for the rest of their lives. You will always want to get rid of this responsibility soonest possible. You can earmark a particular part of your income to use in servicing higher EMIs.
If you can’t afford this luxury, settle for longer tenures. Extended tenures reduce the EMI but the overall outlay will increase substantially. You will end up paying considerable amounts over the loan tenure.
The Interest Rate
Unless you go for a fixed interest rate, you will have no control on this factor. However, lenders tend to stipulate substantially high amounts in fixed rates. Most people prefer to go for MCLR) floating Marginal Cost of Funds Based Lending rate) linked Home Loans.
Theoretically, all the changes in the rates of interest will affect your EMI. However, most lenders prefer elongating the loan term with increase in the rates of interest. It means that they will keep your EMI constant.
If you desire to retain your tenure, then choose to go for the floating EMI. It ends up being less expensive than the fixed rates in the long run.
There are so many external factors that will determine your capacity to repay. It can be your retirement plan, future expenses, annual increments, changing employment status, decrease or increases in income, changes in employment status, lifestyle, etc. get to know each of them and how it can influence your EMI.
Keeping your EMI between 30 to 35% of the monthly income is wise. You can still pay more than the EMI amount if your income allows you. Most lenders don’t charge pre-payment penalties on the floating rate home loans.
You can increase the EMI to match the increases in income levels. You will find it much easier to repay your home loan than you thought.