A reflection on your mortgage

For many mortgage borrowers, EMIs, or equivalent monthly payments, are their biggest expense item. In many cases, the burden of home loan EMIs negatively impacts investable surplus to achieve long-term financial goals. Here are some tips for home borrowers to help them achieve their main financial goals even as they continue to repay their home loans:

Create a financial plan

Home borrowers should first develop a financial plan based on their cash flow, risk appetite and investment horizons. This will help them achieve various financial goals and implement their asset allocation strategies.

Borrowers must first estimate the amount needed to meet crucial financial goals after assuming a certain rate of inflation. Then, take the help of online SIP calculators to calculate the monthly contributions required to achieve each of the financial goals after assuming the rate of return and the investment horizon.

Invest in equity mutual funds for financial goals that mature after five years. The returns generated by equity funds generally tend to easily beat inflation and other asset classes by a wide margin over the long term. The feature of automatic purchases of units in SIPs on predetermined dates guarantees financial discipline and regularity of investments. This can help you benefit from the power of compounding and also averaging investment costs during market corrections or bear market phases.

Invest in fixed deposits, debt funds or other fixed income instruments for financial goals maturing within five years to provide income certainty and principal protection.

Down payments — not to be done

Do not use your existing investments to make a higher down payment or to prepay the loan. Home loan borrowers are required to pay down payment or margin contribution of at least 10% of property cost for loan amount up to ₹30 lakh, at least 20% of property cost for a loan amount between ₹30 lakh and ₹75 lakh, and at least 25% of the cost of the property for a loan amount above ₹75 lakh.

Making higher down payments would reduce the loan amount and therefore the overall interest cost for borrowers. Similarly, paying off a home loan early also helps reduce the total cost of interest. That said, avoid liquidating your existing investments to prepay the loan or to make higher down payments, as this could lead to you qualifying for more expensive loans in the future.

Adequate emergency fund

An emergency fund helps meet unavoidable or unexpected expenses during a time of financial hardship caused by illness or unemployment.

Without an adequate emergency fund, one would be forced to liquidate their existing investments and/or default on their loans.

Home loan borrowers should ideally include their obligations to EMI payable on the loans when considering an adequate emergency fund.

This will protect them from home loan defaults in the event of a financial emergency. It will also prevent them from having any negative impact on their credit scores and future loan eligibility.

An emergency fund should be large enough to cover living expenses and unavoidable expenses such as rent, insurance premium, children’s school fees, IMEs, and the like for at least six months.

Overdraft facility

Borrowers can opt for home loan overdraft facility while availing home loans. This facility allows borrowers to deposit their excess funds in the overdraft account, opened in the form of a savings account or a current account, and attached to the mortgage account. Borrowers can deposit their surpluses into the overdraft account and withdraw from it, as and when required.

The interest component of the home loan account is calculated after deducting the overdraft account balance from the outstanding loan amount. This helps reduce their overall interest cost, without compromising their liquidity.

(The author is Head of Home Loans, Paisabazaar.com)