Credit Wisdom

As a first step, you should ask yourself that what you can afford to buy your home comfortably. However, remember that banks grant you loan based on the net take home pay, and not based on what you save. Hence you must borrow only to the extent you can comfortably repay. Home loan EMI will come back to haunt you on the first of each month to hit your bank account. The EMI itself is derived from the loan amount, tenure and rate of interest at the time of availing the home loan. The EMI should necessarily leave enough cash flow for you to manage your monthly expenses.

Next, do planning for your financial commitments while you service your home loan. Home loans considerably have a long tenure. Therefore, it is important to chalk out a strategy to manage your personal finances accordingly. People should also be careful while signing for attractive looking home loan rates schemes which promise a lower interest rate during first few years and higher floating rates after a couple of years.

It is important to create a financial cushion which can be utilised to fund any extra financial burden during certain periods. People can invest in equity or debt based investments based on their risk appetite. This accumulated fund can be used for the financial requirement to reduce the EMI burden in case of high interest rates periods.
Keep in mind; you have little control on the prevailing rate of interest. Most home loans come with a variable rate of interest. That means, as the bank changes its Base Rate, the rate of interest on your home loan will go up or down to the extent of the change in base rate. The first few years are the ones to watch out for. Any sharp increase in the rate of interest environment can cause a large swing in your EMI.

Maintain different accounts for servicing the loan and savings. When you have separate accounts for tracking different expenses, it becomes more disciplined and easier to control expenses. This will also allow you to track patterns of your expenses on the same head in different months. It will help you sustain your cash flow position comfortable accordingly.

Prepay your loan when you are expected to have gains. Use profits wisely by part prepaying your loan, instead of spending it on purchasing unnecessary luxuries. When you part prepay your loan, you can either choose to reduce the overall tenure of the loan, or bring down the EMI amount.