5 Steps to plan your Home Loan EMI in Advance

Housing loans saw a growth of 14% YoY during the 3rd quarter of 2019. These loans grew by 3.5% QoQ.

The growth of home loans has been stagnant due to several factors like reduced repo rate, the success of PMAY, and the introduction of Section 80EEA. Beneficiaries under the affordable housing schemes can now claim an additional income tax deduction of up to Rs. 1.5 Lakh on the interest paid under this section.

This can be the most suitable time to opt for a home loan and finally purchase/construct a residential property.

Make sure to plan your loan by using a loan EMI calculator before you apply. Your loan EMIs will consume a substantial portion of your income; hence, calculating them beforehand is essential.

Current Housing Loan market at a Glance

  • Average per month disbursal – Rs. 13,500 Crore (after September 2018).
  • Expected growth in 2020 – 13 to 15%.
  • CAGR between FY 2012-13 and FY 2017-18 – 16%.

Remember these few steps to pay your home loan EMI before you opt for one.

Consider the Loan Amount and Down Payment Option

The LTV of your home loan can go up to 80% if the principal ranges between Rs. 30 Lakh and Rs. 75 Lakh as per RBI guidelines for home loans. Meaning, you will only be able to avail a loan that is 80% of your property’s market value.

You have to contribute the margin money, the remainder, as the down payment for your loan. Higher down payment will lower the loan amount and vice versa.

Now, availing a lower amount will not only reduce your EMI but also increase the chances of loan approval.

Hence, consider the loan amount and down payment first. Next, use an EMI calculator to assess your monthly installments.

Evaluate your Current and Future Income

Your current and future incomes are also two determining factors of your loan EMIs. Opt for a higher EMI if you are on the verge of an increment. Higher monthly installments may seem expensive but you will be able to repay the loan quickly.

Evaluate your Current and Future Expenses

Consider your current expenses and the ones that you might come across in the future. The lower obligations you have, the higher EMIs you can opt for.

Lenders usually prefer applicants whose debt-to-income ratio is lower than 50%. It is one of the criteria for home loan eligibility that they can consider before sanctioning you the loan.

Consider the Repayment Tenure

Longer tenures will make your EMIs cheaper. Contrarily, shorter home loan EMI lower your cost of the loan.

For example, say you have availed a housing loan of Rs. 65 Lakh at a rate of interest of 8% per annum. The EMIs and cost of loan for 15-year and 20-year tenure will be –

15 years

  • EMIs – Rs. 62,117.
  • Cost of the loan – Rs. 1.11 Crore (approx.)

20 years

  • EMIs – Rs. 54,369.
  • Cost of the loan – Rs. 1.30 Crore (approx.)

Utilize an EMI calculator to determine not only your monthly installments but also the correct tenure.

Check the rate of interest while applying for a Home Loan

Home loans come with

  • Fixed rates, which remain constant throughout the loan tenure.
  • Floating rates, which changes as per the MCLR.

Opting for floating rates may increase the rate of interest in the future. Hence, you may end up paying high EMIs. On the other hand, it may also decrease, making them cheaper than fixed rates.

Hence, choosing between fixed and floating home loan interest rates can become difficult. However, there are advantages attached to floating rates.
Make sure to use an EMI calculator to plan your monthly installments the right way. Also, part-prepay the loan whenever possible to reduce your EMIs/tenure and save on interest.