5 MinsOct 26, 2022
If you are considering availing of a home loan to buy a house property this festival season, it would be worthwhile understanding the mortgage payment breakdown. After all, it is a big financial decision; you have a debt obligation to shoulder.
Don’t simply get lured and swayed by some exciting housing projects, also asses how much loan you can afford to take so that the repayment does not put pressure on your finances.
If you need help to understand how a home loan is structured, read on to know the main parts of your mortgage repayment:
1) Principal -
This is the amount of the home loan availed, which you are liable to repay. If you have been able to set aside or save enough money for the down payment, the amount you have to borrow is lesser. As a ground
rule, never use your emergency fund (also known as contingency fund or rainy day fund) to make the down payment for the house. Similarly, the money assigned to fulfil other important goals should not be used to make the down payment.
2) Interest -
This is the cost you pay for the home loan and is to be paid as a percentage of the loan availed. During the initial years of your loan tenure, you repay more towards interest, and gradually, as you repay the
loan, a higher portion is adjusted towards the principal component. This is because the EMIs are computed on a reducing balance method. If you accelerate your repayments or prepay, you repay the home loan soon and the total interest cost you
would pay would be lesser.
3) EMIs -
The EMI on the home loan (or any other loan for that matter) includes the interest plus the principal amount to be repaid over the loan tenure. While the EMIs, by and large, would remain uniform during the loan
tenure, you must know how much proportion of the home loan EMI is going towards interest and principal.
In case of floating rate home loans, depending on which direction interest rates move (up or down), either the EMI amount gets altered
or the loan tenure increases or decreases. The option is with you, the home loan borrower, whether you are okay with tweaking EMIs (as per the interest rate movement) or altering the tenure of the loan, depending on what suits you.
Whether
you have a floating or fixed home loan interest rates (where the interest rate is fixed for the entire tenure of the home loan, thereby having no effect on your
EMIs and loan tenure if interest rates change), it makes sense to understand your Home Loan Amortisation schedule. Ideally, your EMIs should not exceed 50% of your Net Take Home (NTH) pay. If you avail of an extraordinarily high amount, it
may prove to be a debt burden for you.
[Also Read: Home Loan and Mortgage Loans - What's the difference?]
4) Mortgage Insurance -
Usually when you avail of a home loan, lenders insist that you purchase a mortgage loan insurance. This protects the lender in the event of an unforeseen situation such as loss of job, death, etc.,
wherein the lender is repaid for outstanding loan dues by the insurance company. Thus, in a sense, mortgage insurance is beneficial for you, the borrower, and the lender.
5) Homeowners Insurance -
Other than mortgage insurance, some comprehensive policies also include coverage for the house and its contents. This indemnifies against the risk of theft, fire, flood, and other disasters. This
again is beneficial for you and the mortgage lender.
A home loan is one of the best ways to build your asset. Plus, it offers tax benefits: Both the principal and interest repaid on the home loan are eligible for a deduction under the Income Tax Act, 1961.
But given that a home loan is a long-term
commitment, you need to be sure of how much home loan you can really afford. If your monthly income is high, you are earning a fixed income, can arrange a higher amount for the down payment, and aren’t having many debts to service; you
may afford a high home loan. But if that is not the case, keep your home loan consciously low.
Make wise use of an online home loan eligibility calculator that may help you take a wise decision. It would provide you with a fair idea of how expensive a house property you can afford by entering details such as your net monthly income, the down payment you can pay, the home loan amount you require,
the interest rate, and the tenure of the loan. You can use Axis Bank’s online home loan EMI calculator, which provides the amortisation schedule as well.
Borrow sensibly for a house that you can afford and timely repay the EMIs on the home loan.
Disclaimer: This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
