Are you preparing to buy a new home? Congrats, you are headed in the right direction. However, several questions plague you.
“How much should I pay as EMI?” “Will I be able to meet all my other requirements after paying the EMI?” “Will I be able to afford the EMI for the entire tenure?”How much of your income should be ideally spent on home loans?”
The questions are aplenty. While the property you buy is entirely dependent on your income, debt and personal preferences there is one rule of thumb that applies to all buyers.
This rule errs a bit on the side of caution, but you can count on it to avoid falling into debt traps. There’s no doubt that it helps in making it much easier to afford your new home while helping you save for other financial goals too.
Without further ado, let’s dig in.
The 40% Rule
While this rule isn’t set in stone, most financial planners and experts recommend this one.
“Ensure that your Home Loan EMIs don’t exceed 40% of your income.”
The most basic guideline for home loan EMIs is that it shouldn’t be more than forty percent of your take-home pay. However, in reality, it’s advisable to keep your entire debt limit below the 40% mark. This includes your other loan products like a car loan or a personal loan if you have availed one.
If you have other loans, then reduce your home loan EMIs to 20% of your total income. It’s true that several lenders offer you loans beyond this mark. However, deciding on the right budget rests solely on your shoulders.
How to implement this Rule?
Figure out your Budget
Work out the budget you can afford, even before you start looking at property listings. This ensures that you don’t go overboard and stick to your predefined limits.
Crunch Numbers
Start by calculating your total expenses for a month. You may think you are aware of your monthly expenditures, but the actual figure may vary. Take a pen and paper and or use a budget app on your phone and get down to business.
List all the expenses made by all members of your family. Include everything small or big. This will give you a clear picture of how much you can pay for your home loan EMI without it being a burden on your pocket.
Make use of online EMI calculators
An EMI calculator is an excellent tool to help you understand all the terms of your home loan. Use it to check out the interest you pay every month, the total interest for the entire term of the loan, the tenure and decide on the right EMI that fits your budget.
Compare, Analyse and Make the Right Choice
Check out the home loans offered by different lenders. Compare interest rates, processing fees, and other terms and conditions to find the best home loan that saves you a lot of money in the long run.
Don’t forget to Factor in other Costs
Apart from the interest, buying a property incurs other costs like insurance premiums, stamp paper duties (which are usually around 5 to 8% of the total cost of your home), property taxes, and repair and maintenance costs. Make sure to factor in these expenses when you decide your budget.
The Last Word: Don’t Bite more than you can Chew
While it may be tempting to buy a penthouse villa in a high-rise apartment complex, right in the heart of the city, it can end up ruining your finances, if it doesn’t fit within your repayment capacity. While it’s great to have a home to call your own, ensure that you aren’t overburdened by your home loan EMI.