How to choose the right tenure or EMI amount for a Home Loan?

Congratulations! Deciding to take a home loan is the first stage to living in your dream home. I am sure you already have an image of a warm, beautiful and perfect home in your mind. A happy home tailor made to your liking – the size, colour and locality all cherry picked as per your taste!

Just as you have planned your dream home as per your needs, your home loan should also be custom made for you. With terms that are perfect for you. Think of a home loan as a financial marriage. For the next 15-20 years, you will have a fixed monthly contribution to be made to your lender.

So, to have a comfortable financial relationship ahead, you need to draft some terms that are agreeable to both parties. Before you commit any tenure and EMI for a home loan, it is imperative to understand your current and future financial commitments. So, let’s get to it:

Current family income

You need to make a note of your total monthly income from all sources. Include all sources of income from the same, like taking weekend classes, any freelance jobs or an income from a side hustle. If you have a long due job bonus due, feel free to include that as well when thinking of the down payment.

Total expenditure

From the total domestic Income as calculated above, subtract your monthly expenses. Include all EMIs, SIPs you would like to continue and all expenses major or minor. To this add your upcoming expenses. Any big investment planned like a car, maybe an addition to the family, or a surgery long delayed.

Provide for any other payables/ liabilities owed by you unless you can close right away. Park some emergency funds for a rainy day, imagine if a virus broke out and everything was shut for some months. Common practice indicates a salary of roughly 6 months to be adequate for an emergency fund.

Now, after subtracting your expenses from incomes for the foreseeable future, the number you get is your total monthly savings. A general rule of thumb says that your EMI should never be greater than 40%. So, 40% of your current calculation should ideally be your home loan EMI. Anything more could prove to be a burden and any less could result in longer tenure and greater overall home loan expense.

Since you have stuck with me till here, let me give you a golden tip. Never judge a lender by their Return on Investment (ROI). The right lender will help you with the right tools to pay back your loan with ease. Prepayment is a borrower’s master key to unlock the secret to closing your loan at the earliest with minimum expense.

Pay any nominal amount additional to your EMI every month and reduce your total principal amount due! As you continue to make regular prepayments, you will end up clearing your loan much earlier than the initial agreement, thereby saving you many extra interest payments and a whole lot of money.

(The author is chief marketing officer, HomeFirst Finance Company. Views are personal)