With rising property prices, buying a home is not easy in the metros. The large budget also means you might have to take a home loan, at times financially stretching yourself to make it affordable.
Unlike other category of loans, home loans are of long-term nature. A job loss or a medical emergency anytime during the loan period can throw your finances off-gear.
If you are finding it hard to repay EMIs on your home loan, there are a few steps that can help you salvage the situation.
1. Assess your Situation
Find out if it is the job loss or overestimation of your future household income levels that has led to the problem. Assess if it’s a temporary hiccup or something that will affect you for a long time. It will accordingly call for efforts to boost income by changing jobs or becoming a double-income household.
2. Liquidate your Investments
Liquidate your emergency fund to make the EMI payments. As a last resort, liquidate your investments in fixed deposits, PPF and mutual funds to bridge the gap.
Restructure your loan by asking for a grace period of say three months. Or if affordability is an issue, increase the loan tenure. An increase in interest rates in the economy might have elongated your loan tenure, if you had opted for floating interest rate loans. If you can’t stomach any more rise in interest rates, switch to a fixed rate.
3. Negotiate with your Lender
If your situation still looks vulnerable, approach your lender. Take all the relevant documents to prove your impeccable credit repayment history. If need be, provide your financial investments as additional collaterals. Update them as to how the income situation might improve over the next 3-6 months.
Restructure your loan by asking for a grace period of say three months. Or if affordability is an issue, increase the loan tenure. An increase in interest rates in the economy might have elongated your loan tenure, if you had opted for floating rate loans. If you can’t stomach any more rise in interest rates, switch to a fixed interest rate.
Check Out Fixed vs Floating Interest Rate
If such negotiations are not working out, refinance the loan from another lender at a lower interest rate or other favourable terms. While doing so, ensure you factor in one-time costs like penalty and processing fees. Also, be aware of the financial implications of stretching the loan tenure in terms of higher interest payments.
5. Bare-bones Budget
Switch to a bare-bones household budget. After meeting your basic necessities, focus all your resources on paying home loan EMIs. It’s okay to lose your car (of your car loan) than your house.
6. Rent your House
If the locality where you are staying has a good potential to earn rental income, give the house on rent. Use the rental money to repay a portion of your EMIs while you relocate to a smaller rental house or sharing options.
7. Sell your House
It is better you proactively sell the house than letting the bank do it through an auction. Being a desperate sale, the latter might not fetch a good price. In contrast, it’s likely you will get a better price if you do it on your own by informing the bank. The sale proceeds can help repay the loan outstanding.
However, be aware of tax implications. You might have to forego all your Sec 80C tax benefits of the past, if you are selling the house within five years of taking the loan. Moreover, if the property is sold within three years of its purchase, it is subject to short-term capital gains tax at your marginal tax rate. Long-term capital gains tax (with indexation benefits) at the rate of 20 percent becomes applicable if sold after three years.
In a Nutshell
In short, buy a house that you can afford right now and not based on expected hike in salary. Liquidate your emergency fund and restructure or refinance your loan to tide over the crisis.