Estimate your cash flow before taking a Home Loan

Home loans are high value loans wherein the quantum of loan is high and so is the EMI. Moreover, the loan is repayable over long repayment tenures and thus the liability continues for substantial periods. Before taking a home loan you analyse the amount of loan required, search for low interest rates and look for the best offers from lenders. You even use the home loan calculator to assess whether the EMI would be affordable to repay or not. But do you ever do a cash flow analysis?

What is a cash flow analysis?

A cash flow analysis is an analysis of your income and expenses. The incomes that you earn in a month or a year is the inflow while the expenses which are payable over the same period of time are called the outflow. Only if the inflow is higher than the outflow can you have surplus funds at your disposal. These surplus funds can then be used to pay off the EMIs of your the home loan.

Why cash flow analysis is necessary before availing a home loan?

It becomes important to do a cash flow analysis before availing a home loan because of the following reasons –

• The analysis helps you ascertain the affordable level of EMIs
  
  

Since the home loan is a longer tenure term loan, having affordable EMIs becomes important to service the loan without making any defaults. To know the level of EMI which would be affordable, cash flow analysis sis necessary.hould be done. The analysis shows the disposable income that you have which helps you to and then you can estimate the EMI which you can affordably pay. Moreover, another cash flow analysis should be done after factoring in the home loan EMIs to find out whether you are saving anything after paying off the loan or not. Having a disposable income after paying EMIs is also necessary for meeting the unforeseen expenses.

• You can maintain your credit score
  
  

Since the analysis helps you determine the best EMI which you can pay, the risk of defaulting on the loan becomes marginally low. As you don’t default on the loan, you don’t incur additional interest payments and you can also maintain your credit score. So, a cash flow analysis is also beneficial for maintaining and improving your credit score.

• You can assess the amount of tax saved
  
  

Home loans are also called good loans because they help in saving taxes. The principal repaid is allowed as a tax deduction up to INR 1.5 lakhs under Section 80C and the interest paid on the loan is also allowed as a tax-free expense under Section 24 of the Income Tax Act. Thus, by factoring in the tax saving advantage of home loans, your tax outflow would reduce which would increase your disposable income. The cash flow analysis would, therefore, help you in quantifying the amount of tax that you have saved through a home loan.

Thus, a cash flow analysis not only lets you understand the affordability of your home loan, it also shows you the disposable income, after paying home loan, which you can invest in other avenues and create funds for your financial goals. So, do the analysis before availing the loan.