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Top 4 ways for managing home loan EMIs and achieving financial goals

Here’s how you can manage your EMIs, build savings, and invest for a bright financial future

Tips for managing home loan EMIs and achieving financial goals

Availing a home loan is a significant long-term commitment, with the interest often exceeding the principal amount, affecting a borrower’s ability to invest in other financial goals. To avoid this impact, it is important to consider a few pointers. These include ensuring that the EMI payments do not exceed a certain percentage of your income, having a contingency fund in place to cover any unexpected expenses, and considering prepaying the loan to reduce the interest burden. By following these steps, you can ensure that your home loan EMIs do not hinder your ability to achieve other important financial goals.

Build an adequate emergency fund                 

Creating and maintaining an adequate emergency fund is a must for everyone as it helps tackle financial emergencies or meet unavoidable expenses, in case of income loss caused due to unemployment, illness or disability. Ideally, an emergency fund should be big enough to meet necessary expenses such as your house rent, utility bills, insurance premiums, child’s tuition fees, and most importantly your home loan EMIs for at least six months. Having your emergency funds in place will help you pay home EMIs by their due dates and thereby, avoid penalty charges and adverse impact on your credit score. A reduced credit score can adversely impact your ability to finance crucial financial goals through loans later on. 

Make a financial plan

Devising an effective financial plan can help achieve various financial goals depending on your cash flow, risk appetite and investment horizons. It also helps in implementing an appropriate asset allocation strategy for your investments. You must first estimate the amount required to fulfil each of the crucial financial goals, an assumed rate of returns, an assumed inflation rate and the investment horizon left to attain such goals. Next, use online SIP calculators to estimate the monthly investments required to reach those financial goals.

Invest in equity mutual funds to achieve financial goals maturing after five years. The returns from the equity fund SIPs easily beat inflation and other asset classes by a wide margin over the long term. The feature of automatic purchase of units in SIPs on pre-specified dates ensures financial discipline and regular investment. These help you to benefit from the power of compounding and ensure the averaging of your investment cost during market corrections or bear market phases. For financial goals maturing within five years, invest in fixed deposits, debt funds or other fixed-income instruments to ensure capital protection and income certainty.

Avoid using existing investments for making a higher down payment or for prepayment

Making higher down payments leads to lower interest costs as it reduces the loan amount. Similarly, prepaying the home loan helps you save on the total interest cost. However, avoid using your existing investments to make higher down payments or for prepaying the loan as it may force you to avail of costlier loans to achieve your crucial financial goals later on.

Opt for a home loan overdraft facility

The home loan overdraft facility allows borrowers to deposit surplus funds in the home loan overdraft account, which is a current or savings account linked to the home loan account. The interest amount is calculated after deducting the balance in the overdraft account from the outstanding home loan amount. The borrowers can withdraw from the linked overdraft account and redeposit it as per their financial requirements. This helps in reducing their overall interest cost, without compromising on liquidity.