Buying a house in India is not just a need or an investment but also carries an aspirational sentiment. Given the ever-inflating real estate prices, many lack the financial means necessary to turn this dream into reality. It has led to a high demand for mortgage loans, which is a long-term commitment and requires well-informed financial planning. This blog will help you manage your finances for a mortgage loan and help you plan better. So, let’s get started!
8 Strategies to Manage Your Mortgage Loan Effectively
Here are some strategies that can help you manage your mortgage effectively:
1. Maintain Your Credit Score
A credit score is one of the many important factors that lenders consider when approving a mortgage loan. A low credit score is often a sign of delayed or missed EMIs, dues, and inconsistent repayment history. The lender might still approve the loan, but the interest rates will be higher.
A higher score can give you much lower interest rates. Here are some ways to maintain your credit score:
- Pay all your EMIs on time
- Try not to utilise more than 30% of your credit card limit
- Avoid borrowing too many loans at the same time
2. Choose the Right Loan Tenure
A longer tenure helps you lower EMIs, but you also pay more overall interest. With a shorter tenure, you pay higher EMIs, but the total interest will be less. Tenure directly influences the interest you will pay on the borrowed amount.
If you plan to take a mortgage loan, you should find the ideal balance between the principal and the cost. Try not to push your EMI so much that you end up compromising your basic lifestyle. Also, avoid choosing the longest tenure to lower the EMIs. An online mortgage loan EMI calculator will help you try out different scenarios to choose the best-suited EMI plan for you.
3. Understand Your Mortgage Loan Inside Out
Before you start managing your mortgage loan, you must understand what you are signing up for. Start by reviewing your loan agreement, the type of interest you have opted for, is it fixed or floating? A fixed interest rate means the interest rate will be fixed throughout the loan tenure. On the other hand, if your loan interest rate is floating, it means the interest rate can change during the loan tenure if there is any change in the benchmark.
Other than your loan interest rate type and rate, you should also pay attention to the borrowed principal amount, amortisation period and prepayment penalties of your lender.
4. Plan your EMI
From the moment your mortgage loan EMI starts, it becomes a regular monthly expense. It is a part of your monthly budget till the end of the tenure, making it a long-term commitment rather than a short-term obligation. Here is how you can plan your EMIs:
- Track your expenses: Make a full list of your expenses, like rent, groceries, subscriptions, travel and more.
- Budget for EMI first: Consider your EMI as a mandatory payment, just like your electricity or water bills.
The key benefit of planning your monthly budget is that it helps you allocate more to EMI and pay it consistently without missing.
5. Avoid Delays and Penalties
Failure to pay a single EMI can severely hurt your credit rating and lead to hefty fines. Follow these tips to ensure you never miss a payment:
- Automate your EMIs
- Maintain your bank account with money before the due date
- Keep a separate emergency fund to pay EMI in case of any unseen situation
Never fail to read your loan agreement to know the consequences of late payments so that you are not caught off guard by such unforeseen expenses.
6. Make Prepayments When Possible
If you have received a bonus or tax refund, use the funds to make prepayments. The key benefit of paying extra funds above your EMI is that it reduces the principal amount and hence reduces the interest component.
- Your interest liability reduces
- Loan tenure lowers
- You'll be debt-free soon
If you want to make a prepayment, first ensure that your lender will not charge you for this. Most lenders don't charge prepayment fees or offer floating interest rates.
7. Build an Emergency Fund
An emergency fund can act as a safety net if you face any uncertainty in future, such as a medical emergency, job loss or an urgent home repair. Keep aside a fixed percentage of income and use it only when essential. This buffer not only enables you to recover but also ensures that you stay on top of your loan repayment.
8. Refinance Your Mortgage Loan
One of the most practical mortgage loan tips you can follow for effective financial planning is to refinance the loan when feasible. Suppose you took a mortgage loan at a high interest rate from the market several years ago. But now, with the inflation and lifestyle changes, managing the loan is getting a bit overwhelming. In this case, you can refinance or transfer the loan to another lender with lower interest rates. Refinancing or transferring your mortgage loan helps you:
- Lower your EMI
- Reduce your overall interest
- Close the loan faster
You must, however, take into consideration processing fees, prepayment charges, legal fees, and more. Avoid refinancing the mortgage loan if it is not helping you save in the long term
To Conclude
Managing your mortgage loan doesn’t require you to make drastic changes in your life. It starts with awareness, planning and consistency. From understanding the loan terms to avoiding delays to building emergency funds, these tips can help you manage your loan effectively.
Frequently Asked Questions
Can I increase my EMI midway to repay the mortgage loan faster?
Yes, most lenders allow you to increase your EMI amount if your income rises. You can increase your EMI mid-term by informing your bank and completing the required formalities.
How often should I check if better interest rates are available for my mortgage loan?
You should review the interest rates once or twice a year to see if a balance transfer or refinancing makes repayment easier.
Should I invest or prepay my mortgage loan with extra money?
If your investments give better post-tax returns than your loan interest, investing is a wise decision. Otherwise, prepaying helps reduce debt.
Is it okay to miss one EMI if I pay double next month?
No, missing even one EMI can hurt your credit score and attract penalties. Always inform your lender in advance if you cannot pay the EMI or if there is a delay.
Can I switch from a floating to a fixed interest rate on my existing mortgage loan?
Yes, many financial institutions offer this option, but there may be a small transfer fee involved. Check with your lender for exact terms.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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