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Having all aspects in order for your Home Loan application is crucial, as it affects approval chances and the offer terms and conditions. One such aspect is your repayment capacity.
As the name suggests, it refers to your ability to repay a Loan. It primarily depends on your monthly income and liabilities. A set of other Housing Loan eligibility factors also affect it.
Monthly liability is a broad concept encompassing debt, expenses, and other components. Calculating it before making a Home Loan application is important. The blog explains why.
Why is Calculate Monthly Liability Before Applying for a Home Loan?
- To gauge affordability:
Affordability is how much you can repay every month without any hassles or compromises. It influences how overall repayment cycle.
If the monthly liability is high, your affordability could be low. Hence, you may not be able to take on a Loan with a significant EMI amount.
On the other hand, if the monthly liability is low, you may have decent affordability. Given this, you may be able to take on a Loan with a high EMI payable.
- To plan your repayment:
A Home Loan is a long-term commitment. Therefore, plan its repayment in advance and focus on efficient execution.
Considering your monthly liability is a must when planning your Home Loan repayment. It helps you understand the amount of funds needed to be set aside for repayment and other expenses.
This ensures you have a sufficient amount of funds for both commitments. The Home Loan EMI calculator is a tool that comes in super handy to plan your Loan repayment.
The calculator provides an estimate of the payable EMI. You can access it by logging on to any banking or financial website or mobile app.
- To maintain an emergency fund:
Having an emergency fund is beneficial. It helps you manage planned and unplanned financial requirements without tapping into your savings or taking on additional debt.
One of the most practical ways to build and maintain an emergency fund is to consciously contribute funds to it and refrain from unnecessary withdrawals.
For this, knowing your monthly liability is crucial. Without this understanding, you could be blindly managing all financial aspects.
How To Calculate the Monthly Liability Before Taking a Home Loan?
There are many ways to calculate your monthly liability. Below, we mention a general calculation method that you can consider adopting:
- Note down fixed expenses:
Fixed expenses are expenses that you need to take care of every month. Delays or non-payment of them can lead to serious consequences.
Hence, take note of those and set aside funds as you receive your income to avoid any issues.
Common fixed expenses are rent (before moving into your own home), utility bills, groceries, medications, insurance premiums, etc.
- List variable expenses:
Variable expenses are expenses that vary according to your changing requirements and desires. At times, you may want to take care of them instantly, while at other times you may consider pushing it further.
Ideally, list down the variable expenses you are likely to incur in a month. This will give you a rough idea of the funds you should keep for them.
Regular variable expenses include dining out, leisure travel, entertainment, shopping, and more.
- Add them all up:
Once you have identified your fixed and variable expenses, add them and subtract the total from your monthly income.
This will give you the monthly liability figure. You could also consider adding 5 to 10% to this figure to accommodate any difference in the actual expenses.
Overall, you can use a regular calculator or specialised apps to do this. It will take very little time to complete.
Summing It Up
Home Loan approval and offer depend on several eligibility factors, one of the most important ones being your repayment capacity.
Your repayment capacity is based on your income and monthly liability. Hence, calculate your monthly liability before applying for a Home Loan.
This helps you gauge your affordability, plan your entire Loan repayment, and have a contingency fund in place, all of which contribute to long-term financial stability.
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