Applying thought to your home loan. A few key steps can help ensure that your other financial goals are not compromised

Ratan Chaudhary

For many home loan borrowers, EMIs, or equated monthly instalments, constitute their single largest expense item. In many cases, the burden of home loan EMIs adversely impacts the investible surplus for meeting long-term financial goals. Here are a few tips for home loan borrowers to help secure their major financial goals even as they continue repaying their home loans:

Create a financial plan

Home loan borrowers should first devise a financial plan based on their cash flow, risk appetite and investment horizons. This will help them fulfil various financial goals and implement their asset-allocation strategies.

Borrowers should first estimate the amount required for fulfilling crucial financial goals after assuming a certain inflation rate. Then, take the help of online SIP calculators to calculate the monthly contributions required for achieving each of the financial goals after assuming the rate of returns and investment horizon.

Invest in equity mutual funds for financial goals maturing after five years. The returns generated by the equity funds generally tend to easily beat inflation and other asset classes by a wide margin over the long term. The feature of automatic unit purchases in SIPs on pre-specified dates ensures financial discipline and regular investment. This can help you benefit from the power of compounding, and also ensure the averaging of investment cost during market corrections or bear market phases.

Invest in fixed deposits, debt funds or other fixed-income instruments for financial goals maturing within five years to ensure income certainty and capital protection.

Down payments — don’ts

Do not utilise your existing investments for making higher down payment or for prepaying the loan. Home loan borrowers are required to make down payment or margin contribution of at least 10% of the property’s cost for a loan amount of up to ₹30 lakh, at least 20% of the property’s cost for a loan amount between ₹30 lakh and ₹75 lakh, and at least 25% of the property’s cost for a loan amount more than ₹75 lakh.

Making higher down payments would reduce the loan amount and thereby, the overall interest cost for the borrowers. Similarly, prepaying a home loan also helps in reducing the total interest cost. Having said that, avoid liquidating your existing investments for prepaying the loan or for making higher down payments, as doing so could lead you to avail of costlier loans in future.

Adequate emergency fund

An emergency fund helps meet unavoidable or unforeseen expenses during a period of financial distress caused by illness or unemployment.

Without an adequate emergency fund, one would be forced to liquidate their existing investments and/or default on loan repayments.

Home loan borrowers should ideally include their obligations towards the EMI payable on loans when they consider an adequate emergency fund.

This will safeguard them from defaulting on home loan repayments during financial emergencies. It will also save them from any adverse impact on their credit scores and their future loan eligibility.

An emergency fund should be big enough to meet living expenses and unavoidable expenses such as rent, insurance premium, children’s tuition fee, EMIs and the like for at least six months.

Overdraft facility

Borrowers can opt for home loan overdraft facility while availing of home loans. This facility allows borrowers to deposit their surplus funds in the overdraft account, opened in the form of a savings or current account, and linked to the home loan account. Borrowers can deposit their surpluses in the overdraft account and withdraw from it, as and when required.

The interest component of the home loan account is calculated after deducting the balance in the overdraft account from the outstanding loan amount. This helps in reducing their overall interest cost, without compromising on their liquidity.

(The writer is Head of Home Loans, Paisabazaar.com)