A quick guide to calculate the budget and the EMI for purchasing a home, based on one’s earning capacity and the steps you need to take in advance, to meet this financial commitment
For most people, buying a home is a one-time purchase. Consequently, buyers often tend to overstretch themselves financially, to invest in the best property they can buy.
Considering that investing in a house is perhaps the single biggest financial commitment that most people make during their lifetime, it is important to use objective criteria, to decide how much you can afford.
Budget
Financial planners advise that the sum total of your EMIs should not exceed 40% of your take-home salary. Thus, if your take-home salary is Rs 1 lakh, your EMI should ideally, not exceed Rs 40,000 each month. If you have other loans, then the EMI that you can pay on your home loan gets whittled down further.
Let’s understand with an example:
- EMI Payment: Suppose your EMI is Rs 40,000 per month for your home loan.
- Interest Rate & Loan Term: With an interest rate of 9.75% and a loan tenure of 15 years, the maximum loan amount you can borrow is Rs 38 lakhs.
- Loan-to-Value Ratio: If the bank offers you 80% of the property value as a loan, the remaining 20% must come from your own funds.
- Maximum Property Value: Based on this, you can afford a property worth around Rs 47 lakhs.
If you wish to increase the loan amount, you can club your spouse’s income with yours and borrow more. However, this option has a pitfall. Whenever you decide to start a family, you may go from being a double-income to a single-income family and the inflow of money into your household will dip.
Ensure that there is enough money left, through the tenure of the loan, after paying your EMI, to meet your daily expenditures and also for some other needs, such as entertainment, education, etc.
Down payment
You will also have to systematically save money to make the down payment on the house.
- Down Payment: You need to systematically save money for the down payment, which is typically 20% of the house cost, as the bank won’t finance this portion.
- Saving for Short-Term: If you plan to buy a house within the next three years, focus on low-risk investment options like fixed deposits and fixed maturity plans (FMP).
- Saving for Medium-Term: If you plan to buy a house in five to seven years, conservative investors can consider monthly income plans (MIPs) of mutual funds.
- Risk Appetite: If you are open to some risk, you can invest in balanced funds or even equity funds.
Get into the habit of saving money
During the period, when you are saving money for the down payment, put aside some additional money, every month. This will give you a rough idea of how much you can afford to spend on the EMI, without stretching your budget excessively.
Conclusion
Buying an apartment is a significant financial commitment that requires careful planning and preparation. By sticking to a structured financial plan and considering your future financial stability, you can make the process of purchasing a home smoother and more manageable.
Frequently Asked Questions
Q. What percentage of my salary should I allocate for EMIs?
Financial experts recommend that your total EMIs should not exceed 40% of your take-home salary to maintain financial stability.
Q. How can I increase the loan amount for buying an apartment?
You can increase the loan amount by clubbing your spouse’s income with yours, but be mindful of future changes like a single-income household.
