The document discusses 5 golden rules for managing housing loan EMIs. The rules are to pay EMIs that are 40-50% of monthly income, avoid flexible EMIs that automatically increase/decrease, never reduce EMIs during prepayments, set up auto-debit of EMIs to avoid missed payments, and create a contingency fund equal to 3-6 months of EMIs. Following these rules helps borrowers better handle their loan payments and financial commitments over the long housing loan duration despite uncertainties.

1. Housing Loan

2. 5 Golden Rules of Housing Loan EMI

3.  Housing Loan EMI is an important part of borrower’s life till
Home Loan is closed. Entire family think, eat, drink and sleep
Home Loan EMI. I mean to say, all imp decisions of family revolve
around this income “guzzler”.
 As housing loan is long term commitment therefore we come
across various situations and turning points where we don’t know
how to handle Home Loan EMI. Any mishandling can have long
term financial implications. In this post on “5 Golden Rules of
housing Loan EMI”, we will discuss 5 such imp rules which should
be guiding light to decide.

4. Rules for Home Loan EMI
 The point I am trying to make is that under uncertain
environment you cannot commit Flexi EMI. It’s a different matter
if you are in the govt job. Assuming you and your wife opted for
Step up EMI option with assumption of 10% increase in income.
 Unfortunately, your wife has to leave the job to extend the
family. It will upset household expenditure and also the
probability of Home Loan EMI default is very high, in this case.

5. Home Loan EMI as a % of Income
 Recently you might have observed lot of publicity around new
housing loan products under the broad umbrella of Flexi EMI. It is
not a new concept, you can voluntarily increase your EMI or
decrease at the time of prepayment provided home loan tenure is
not breached. Also under floating interest rate, you can prepay any
time without any penalty.
 Common terms used for Flexi EMI are “Step Up” and “Step Down”.
Only difference is that in such products, any increase / decrease is
inbuilt with the product. Basically, these products are designed
based on certain assumptions. For example, your income will
increase 10% p.a. which may or may not be true.

6.  Life is uncertain and it will be more uncertain in coming years.
The magnitude of uncertainty is increasing day by day. Recently
one of my friends company was acquired by global social media
giant.
 She was so happy to be part of global brand and threw the party
for all friends…Next day she received pink slip and was informed
that Social Media Company would like to retain only a few
employees of acquired company. Now she has home loan to
manage and entire financial calculations went haywire.

7.  The golden rule to follow is that you should always pay 40% or 50%
(depending on comfort level) of your monthly income as Home Loan
EMI. Let say, your salary at the time of availing Home Loan was Rs 1
lakh and EMI was Rs 40k.
 This year, you received 12% increment therefore you should increase
your EMI in the same proportion i.e. 12%. Revised EMI will be Rs
44,800 and Salary is Rs 1, 12,000. Take another example, your salary
is Rs 50,000 and EMI is Rs 20,000.
 You availed “Step Up” Flexi EMI. Your employer decided not to give
any hike this year, but your EMI will increase by Rs 2,000. It will
burden your financials. Follow the golden rule of housing Loan EMI
should be 40% / 50% of Monthly Income. The control to increase the
EMI should be in your hand.

8. Never Reduce EMI at the time of
Prepayment
 At the time of making prepayment, the strong urge
is to reduce Home Loan EMI. Reason being entire
family is tired of cutting down expenses; the common
consensus in the family is to cut Home Loan EMI.
 You may cut down on prepayment and utilize for
family activities but to reduce EMI is not a wise
decision.

9.  Any reduction in EMI will increase your interest outflow
thus increase the overall cost of property.
 Home Loan prepayment is normally done on receipt
of Annual Performance Bonus or on maturity of an
investment.
 Prepayment will reduce your Home Loan tenure. I
mentioned in one of my post that you should try to close
Home Loan before kids college education start.

10. Auto Debit Home Loan EMI
 I always suggest my clients to opt for Auto Debit of Home
Loan EMI. Normally banks prefer an account in the same
bank though it is not mandatory or compulsory.
 You may opt for ECS mandate. Cheque payment is prone
to a manual error which may result in payment default.
Even in cases where banks failed to deposit cheques on
time, it impacted CIBIL Score of the borrower.

11.  In few cases, there was signature mismatch or date was
wrongly mentioned. To avoid all these issues, it is always
advisable to opt for Auto Debit of Home Loan EMI.
 Preferably, you should link ECS with your salary or current
account in which you receive your income.
 Default in auto debit is also very common as many people
forget to transfer Home Loan EMI from salary account to
Auto Debit Account.

12. Home Loan EMI Contingency Fund
 As I always suggest creating 2 types of contingency funds i.e.
one for household expenditure and second for Housing Loan
EMI.
 It is created for any unforeseen circumstances like job loss or
loss of income due to health issues.
 This contingency fund should be 3 / 6 months EMI depending
on the nature and stability of the job. In the case of single
earning member, entire home loan amount should be covered
by Online Term Insurance Plan.
 Contingency fund money should be kept separate and you
should never utilize the same. You may invest this amount in
Liquid funds; you can withdraw it within 1 – 2 days.

13. EMI Holiday
 Not many people are aware of this concept.
 If you face any financial problem then you can discuss
with your bank rather defaulting on Home Loan EMI.
 Depending on your payment record and if the bank is
convinced that your problem is genuine then you may get
3 months EMI Holiday.
 Home Loan EMI payment default impacts your CIBIL score
negatively therefore EMI holiday will come to your
rescue. EMI Holiday is not guaranteed and is at the sole
discretion of the bank.

14.  In some Home Loan products, it is bundled with the
product wherein a borrower can avail once or twice
during the Home Loan tenure.
 This facility should not be misused and remember
that if you are not paying EMI then your interest is
increasing. EMI Holiday should be used only during
the emergency.

15.  To summarize, nothing can replace proper financial
planning. At the same time, no planning is perfect in this
world. Life throws some unexpected situations. We can’t
avoid or control, but it is advisable that we should be
better prepared for such situations. By following golden
rules of housing Loan EMI, we can manage and control
our EMI in a better way.
http://www.nitinbhatia.in/home-loan/home-loan-emi/

16. Thank You…

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