A home loan buffer is a sum of money put aside for managing home loan repayment in the case financial circumstances change.
A home loan buffer helps a borrower create a backup for the existing budget.
Building a buffer, especially when times are favorable, is a wise way to safeguard yourself against unprecedented changes that may not be advantageous.
In case of unexpected circumstances like a sudden, unforeseen hike in interest rate, a job change, or other unexpected events that may need additional financial support, a buffer comes in super handy. It gives one the peace of mind and at the same time, acts as a support when it comes to paying off home loan EMIs.
Why Must You Buffer Your Home Loan EMI?
Buying one’s own house is a dream come true for most of us. The Indian government is encouraging individuals to invest in a home by making these investments eligible for a tax deduction. When one buys a house on a loan, it comes with multiple housing loan tax benefit that can reduce the tax outgo. Besides, to avail of more benefits, you can keep a reserve equal to 3 months of home loan EMI payments. Here are some of the reasons to do so.
- When buying a new house, you will have other expenses, besides home loan EMIs. Stamp duty, interiors, shifting costs, home registration charges, maintenance bills, and brokerage fees are some of the costs typically incurred.
- In case property possession is delayed, you will also have the burden of rent plus the home loan EMI. The delay may last longer than the premium holiday your lender offers. So, you need a backup so that you can pay both the house rent and EMIs.
- In case you are laid off from your job, do not have another source of income, and still must make payments for the home loan EMI, a buffer will come handy. Plus, you can also use the home loan EMI buffer to avoid defaults.
- There are some months when expenses inevitably increase. For instance, our expenditure typically increases on birthdays and during festivals. It helps when there is some money already saved to cope with the increased outflow.
- In case of an unfortunate event, it takes time to avail of insurance policy benefits. In such a scenario, one can use their home loan buffer until they have money from the insurance policy.
If luck favors you, you may not even have to use the home loan EMI buffer amount ever. In such a case, you can then use it to make a full prepayment or pay a part of your Home Loan.
You May Read: When is the Right Time to Refinance?
How to Buffer Your Home Loan EMIs?
#1 Work out Your Number
Before you start saving for a home loan buffer, the first step is to work out the minimum amount you will need to save. Some experts opine that you need to have an equivalent of up to six months of Home Loan EMI repayments saved to see you through.
For instance, if your home loan EMI is Rs. 12,000, you must build a buffer of at least Rs. 36,000. Until you have saved the amount, you must keep making savings towards this amount a priority every month.
You May Read: Benefits of Taking Out a Home Loan
#2 Consider Where to save the Home Loan Buffer
The next step is to consider where you can save your home loan buffer. You would also want to generate interest while you are building the buffer. Thus, it’s best to choose any investment or savings account. You could also consider linking your loan buffer savings to the home loan.
#3 Transfer a Lump Sum
If you have money saved in other bank accounts, start building your home loan buffer by moving all or some of this into the redraw facility or your offset account. If you have not saved money yet, consider building a home loan buffer by saving your tax refund, bonus, or by selling items you no longer use.
#4 Try to Get a Better Interest Rate
If you can get the lowest home loan interest rate, try for it. If you keep contributing the same amount for the home loan as you are doing at present, you will be able to start building a buffer.
Connect with your lender to see whether they will agree to bring down the interest rate. If they are still not willing, it may be time to transfer the loan elsewhere. Interest rates are at a record low and competition between lenders currently is also intense. This means that it may be the right time to refinance the home loan.
You May Read: Ways to Reduce Housing Costs in Retirement
Final Thoughts
Creating a home loan buffer needs discipline but these easy steps will make building a home loan buffer far easier for you.