Applying for a home loan is a wise option to fulfil your dream of owning a house. However, it requires you to stay financially committed for a long time due to longer loan tenure. It is worth noting that you must make EMI payments without any defaults, or else your lender can possess your property to recover the loan amount.
The downside of a housing loan is that you will need to continue paying the loan amount regardless of any changes in your income, job market, or the rising inflation, which leads to a huge burden on your finances. Therefore, it is imperative to buffer your EMIs for tough months and manage your finances during a financial crisis in the future.
Why should you buffer your housing loan EMIs?
- Buffering your home loan EMIs is a smart way of planning contingencies. As a rule of thumb, keep at least three months of EMIs as a reserve. Here is why you should buffer your EMIs:
- If the possession of your property delays, you will have an added financial burden of paying the rent with your home loan EMIs. The delay could take longer than the premium holiday your lender grants you. It compels you to pay both the rent and EMIs.
- There are other expenses besides paying the loan amount along with the housing loan interest rate, such as stamp duty, home registration charges, shifting costs, brokerage fees, society maintenance fees, etc.
- Sometimes, our monthly expenditure increases due to festivals, birthdays, or weddings. Having some of your money put aside can reduce the financial burden in such cases.
- If you lose your job or endure a reduction in your income, you could use a housing loan buffer to avoid defaulting on loan payments.
- In the case of meeting with an accident or financing your or your loved one’s COVI-19 treatment, you can use a home loan buffer to pay off medical bills until you receive the health insurance policy benefits.
How to buffer your EMIs for tough months?
Here are the measures you can take to buffer your home loan EMI to meet financial contingencies:
- Assess your needs
It is crucial to assess your needs before applying for a loan. You must choose a loan amount that you need based on factors such as current monthly income, future increments, job security, promotions, bonuses, etc.
- Choose the right loan tenure
Make sure that the loan tenure serves you well enough. The repayment tenure should neither be too long nor too short. Choose a housing loan tenure so that you can afford the calculated EMIs without any financial burden.
- Reorganize your monthly budget
Make sure to include your EMIs in your monthly EMIs. You should also have a plan to pay utility bills in your new house. Avoiding reorganizing the budget will cause financial stress and possible default in your EMI payments.
- Opt for prepayment
If you have the budget, choose to prepay a certain percentage of the loan amount. It not only reduces the total loan amount owed but also lowers the housing loan interest rate. This is especially in case you get any bonuses / incentives from your organisation, or any additional sources of income.
- Build an emergency fund
It would be wise to put some of your income aside to build an emergency fund. The benefit of having an emergency fund is that you can continue to live stress-free during financial instability, as the emergency fund can meet unexpected financial requirements. You can also pay your EMIs, in case you are tight on budget for a particular month.
- Avoid taking new loans
Equated monthly instalments of your home loan can add significantly to your debt and may last for over a decade. So, avoid taking new loans unless you are in dire need. Do not overuse your credit cards for unwanted expenses as the interest rates are higher and if you do, make sure to pay off your monthly bill on time, and in full. You will reduce the stress of paying many bills in tough months if you keep your debts at a bare minimum.
- Make use of tax benefits
You can avail of a tax deduction for the interest paid on a housing loan. As a borrower, you can also claim tax benefits for associated expenses like home loan processing fees, home renovation loans, stamp duty, registration fees, etc. You can avail of up to Rs. 2 lakhs on the interest paid under section 80C of the Income Tax Act 1961, which can be used to buffer your home loan in tough months.