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Prudent planning of finances for Home Loan

Saturday, February 24, 2018
By Property Team

A home loan is a long-term commitment for a borrower. Home loan borrowers need to manage their finances intelligently in order that their loan repayments do not become a major burden

When a major chunk of the salary goes towards the loan repayment, other important expenses get overlooked. Planning finances becomes a major challenge. Therefore, you need to plan all your expenses over a long term carefully if you are going in for a home loan.
While planning finances you need to look into your inflows and outgo. For the majority of people salary is their only source of income. A small  percent of the population has other sources of income from bank deposits, mutual funds or stock market operations.  

Avoid unnecessary expenditure
Prudent planning of outflow is most important as there is only one source of income and when you have a large commitment like buying a home, you need to honour this commitment more than anything else. Hence taking credit cards, buying white goods should take a backseat. Any ostentatious spending on interiors should also be avoided. Knowing your future income earning capacity will help you assess your potential correctly and plan your outflow. In a downturn, where people are finding it difficult to retain their jobs, you need to do better planning so as to honour your long-term liabilities first. If you thought that your home loan was the only long-term commitment, it is not so. Children's education, medical bills, marriage expenses, and emergencies are all major expenses. You may also have other debts like personal loans, credit card bills and vehicle loans. Spending too much of your income and improper management of money, can lead you to a debt trap.

The tenure of any typical home loan is usually long. And owing to inflation and other pressures, a floating rate of interest is bound to go up as years pass by. So, your EMI due to the lender may shoot up, but your salary may not move up by the same fraction. Hence, when planning for repayments keep a considerable cushion for these increases in rates.

Don’t default
In case a borrower faces some financial problems, making it difficult to pay the EMIs, he can take it up with the bank. It is not good to default on the loan. Usually, the bank works out a way to resolve the borrower's problems either by reducing the EMI and increasing the tenure, or by providing him with some cushion in terms of a reduced interest rate, based on past repayment history.

Best way for prudent financial planning is, in case of any extra income like bonus don’t spend it entirely. Be thrifty and invest the money in PPF, postal savings or fixed deposit. Don’t keep idle money in the bank, look at ways to earn some money on it. Do not incur expenses though credit card and multiple credit cards.  You will end up foregoing your home loan payment by honouring your credit card payments.

Get insured
Some of the banks are giving insurance cover for a home loan. It is vital that you go in for this insurance cover where the premium would come lower as compared to a cover that you may get if you approach the insurance company individually. The insurance cover which is only to the extent of the loan and operational during the term of the loan is an additional safety net as in the case of any untimely death of the borrower, the home is secured and the wife and children continue to enjoy the property. Paying a small premium for the insurance cover is a small price to pay considering your loan will get repaid in the event of unforeseen contingencies and the death of the borrower.

Research on options
Many banks provide options such as step-up and step-down EMIs. They increase the EMI based on earnings and expenses of the borrower in the later years of the home loan tenure and vice-versa. One should look for such options while signing up for a home loan. A transfer of the loan from one bank to another should be considered. Usually, banks charge a foreclosure penalty and the new bank will charge a loan processing charge. This way, the borrower loses at both the places. Borrowers need to weigh the benefits of a loan transfer and the price they pay to use this option.

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