A home loan is a long-term repayment commitment. The overall interest cost usually exceeds the principal loan amount, which in turn impacts the investments of the borrowers obstructing their important financial goals.
Below mentioned are a few steps that can guide home loan borrowers to maintain a healthy balance between their home loan repayment obligations and other financial requirements:
An adequate emergency fund is a must
Home loan borrowers should create an emergency fund to meet any unavoidable financial emergencies, such as loss of income due to unemployment, medical emergencies, etc. The emergency fund should be huge enough to meet their necessary expenses such as house rent, child’s education, utility bills and home loan EMIs for at least six months. Thus, maintaining an adequate emergency fund covering the home loan EMIs of six months would allow the home loan borrowers to repay their EMIs on time during financial emergencies. This would save them from any adverse impact on their credit scores. A low credit score would reduce the chances of availing home loans or personal loan in future.
Make an effective financial plan
Creating a financial plan can help achieve your future financial goals based on your liquidity, risk appetite and investment horizon. A financial plan would also help in creating an asset allocation strategy for investments. One should start the process by determining the amount required to fulfil their financial goals, setting investment horizons for the financial goals, assuming an average inflation rate for the investment horizon and assuming an annualised rate of returns for the chosen instruments. Then, they should use online SIP calculators to determine the monthly investments required for achieving each financial goal.
Do not use your long-term investments to make higher down payments or prepayments
As per the RBI guidelines, the home loan LTV ratio is capped at 90% for loan amounts of up to Rs 30 lakh, at 80% for loan amounts ranging from Rs 30 lakh to Rs 75 lakh and at 75% for loan amounts above Rs 75 lakh. Making higher down payment reduces the loan amount availed, which in turn reduces the overall interest cost of the home loan. Similarly, making prepayments also reduces the outstanding principal amount which in turn reduces the overall interest cost. However, it is not advisable to use your existing investments, set aside for crucial financial goals, for making prepayments or for making higher down payments. Doing so may force you to avail loans at higher interest rates to meet your important financial goals in future. Thus, prospective applicants seeking high LTV ratios should check with as many lenders as possible to compare their LTV ratios. The best way to do so is to visit online financial marketplaces like Paisabazaar, which provide home loan offers from multiple lenders based on the credit profile of the loan applicant.
Opt for a home loan overdraft facility
A home loan overdraft account is a current or savings account linked to the existing home loan account wherein the existing home loan borrowers can deposit their surplus funds and withdraw from it as per their requirements. The interest cost is calculated after deducting the amount in the overdraft account from the outstanding home loan amount. This reduces the overall interest cost of their home loans while retaining surplus liquidity to meet their cash flow requirements. Thus, fresh home loan borrowers or those planning to transfer their home loans to other lenders at lower interest rates can consider the home loan overdraft option.
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