Lavanya and her husband recently moved back to Bengaluru, the place where they have been working for almost a decade. When the Covid-19 wave hit in 2020, the couple like many software engineers shifted to their hometown and worked from home. Before that, they were living in a rented apartment near their office paying a monthly rent of Rs 25,000. 

To their surprise, they found that the same flat is now being charged a rent of Rs 40,000 by their landlord. Thanks to office occupancy, returning to normal and businesses picking up post the third wave of the pandemic, rent rates in Bengaluru have shot up by about 40-50%.

Now, the couple is contemplating buying a house in the suburbs of Bengaluru with a loan of Rs 50 lakh. They can at least own an asset by paying a tad more (Rs 50,000 as EMI) instead of paying rent.

Are they doing the right thing? Here are some signs to figure it out:

Rule #1: You can make the 20% down payment

Lenders usually ask for a minimum down payment of 10% of the property value from the borrower while the rest is financed in the form of EMIs. However, ensure you accumulate at least 20% of the property value before taking a home loan which only reduces your EMI amount – making repayment a tad easier. 

More importantly, make the down payment without dipping into your emergency fund. The additional debt burden calls for bumping up your emergency fund further. Say, by including EMIs of about 4-6 months. Such additional buffers help glide through tough situations such as a job loss or a medical emergency.

Rule #2: You have a steady income

Purchasing a house is a long-term decision that can result in a 15 to 20-year mortgage. If you are uncertain about your finances and unsure, if, you will be able to continue with your current income levels, shelve the idea of buying a property. You can always continue to save for it and buy whenever you are financially confident.

Rule #3: Your EMI is well within budget

The general rule is that your house EMI shouldn’t exceed 30% of the household take-home salary. Furthermore, all other EMIs taken for education, car, personal and home refurnishing shouldn’t exceed 20% of your take-home salary. 

Also, EMI can increase or decrease based on the interest rates of a floating-rate loan. So, play it safe and ensure all your monthly debt repayments (including that for your home loan) don’t exceed 40% of your salary. The other 10% can be a cushion to deal with unexpected rate hikes.

While computing EMI, ensure you are not elongating home-loan tenure beyond 20 years. The longer the tenure of the loan, the more interest payments. In addition, a loan schedule that stretches beyond your retirement years should be avoided.

Rule #4: Your credit score is good

A good credit score of 750 or above can fetch you the lowest rates in the home loan market. So, check your CIBIL score. If it isn’t ideal, work over it by paying your credit card dues and other loans on time. 

Refrain from applying for a loan/ credit card frequently or multiple times. This depicts your financial situation as worse than it could be in reality. Keep your credit utilisation ratio below 30% and hold on to unused credit cards to improve your credit card score. 

Rule #5: You continue to save for other goals

A home loan is typically for 15 to 20 years. If you don’t save and invest during this period, there is the risk of not having enough money to achieve long-term financial goals such as retirement. If you can manage your monthly household expenses, pay home EMIs and still have enough money to save for retirement, only then buy a house.

Rule #6: You can manage both rent and EMI for an under-construction property

Buying an under-construction property has the advantage of giving time to arrange for finances. Typically, the builder asks the buyer to make a booking amount of 10-15% of the property value. And the remaining payment is linked to construction milestones, usually over 3-4 years. For instance, the buyer pays 10% of the cost of the construction of each floor and so on.

Of all the financing options, it is the least risky but only if the builder is of repute and has a good track record in delivering flats on time and according to the quality promised. 

However, the buyer also needs to evaluate if he can fork out rent as well as Pre-EMI (if going for a loan) without a financial stretch in the initial years. 

Rule #7: You have the necessary insurance

Taking a home loan puts additional financial responsibilities on a family. It is important, therefore, for its earning members to take a life cover so that children and other dependents do not struggle with finances in case of death in the family. Whether you are taking cover based on your annual income (say 10-12 times) or a human value indicator, ensure it is enough.

Similarly, buy adequate medical cover for you and your family to manage medical contingencies. 

Rule #8: You still have cash after the downpayment

A lot of other expenses come along with buying a house. Not accounting for it could give you a financial surprise. For instance, furniture, modular kitchen, electronic appliances, painting and other costs could be at least 10% of the cost of the property in major metros. Besides, there are expenses for registration of the property, car parking and monthly maintenance costs. So keep healthy cash in hand. 

Here’s your takeaway

Steady income, 20% down payment and healthy liquidity are paramount for house buying. Also, ensure the EMI is not more than 30% of your take-home salary. You should be able to do this while saving for other financial goals without stretching yourself to the point of discomfort.