Here’s a fact for you. The average home loan amount given by Housing Finance Companies is for Rs 25 lakhs – Rs 30 Lakhs, as per an ICRA estimate. This means that the average EMI amount is roughly between Rs 25,000 - Rs 30,000 per month, if you consider the thumb rule that your loan EMI is about 1% of your total loan amount. Home loan interest rates as of this year are anywhere between 8.5%-10%, based on who is getting the loan and for how long.
Depending on how much a household earns, a Rs 30,000 EMI may be a significant sum or not. But big or not, the impact on your household finances will be substantial. Keeping this in mind anyone considering a home loan should go through the following preparation checklist. This will help you understand if you are ready to handle the burden of a home loan.
1. Do you have the down-payment arranged?
You generally need to come up with 20% of the home’s cost including registration (as a down payment) before you can get a loan. Have you arranged that for your planned home?
2. Is your income enough to be eligible for a sufficient home loan amount?
Most banks and housing finance companies will analyse your income to decide the loan amount you are eligible for. The income they will consider is your income net of taxes and deductibles such as LTA. Finally, your monthly loan EMI cannot exceed, generally, 50% of your net monthly income.
If you are taking a loan bigger than can be afforded by you alone, consider taking a joint mortgage with your spouse. Also, a good rule to have is to limit all your EMIs to a maximum of 40% of your net take home salary or household income.
An emergency fund is an absolute must during the loan repayment period, and it must include your EMIs for at least four to six months.
3. Does your EMI amount consider that you need to keep saving, for current as well as future fixed expenses?
Considering whether you can manage your expenses along with the burden of the loan EMI might seem like a no brainer, but many forget to consider whether they can still save. Saving and investing shouldn’t stop when you decide to go for a home loan.
A home loan can last for a decade or more. If you don’t save, and invest, during that period you risk not having enough money for long term financial goals such as retirement which require a long saving period.
4. Do you have health insurance for yourself and your family?
Health insurance for yourself and your family can ensure that any health emergencies don’t break your back during the loan repayment period. Most of you might have health insurance from your employers, but it is a good idea to get separate and more adequate coverage.
5. Do you have an emergency fund, and does it consider the expected home loan EMI commitments?
An emergency fund is an absolute must during the loan repayment period, and it must include your EMIs for at least four to six months. No one can guarantee that you won’t have emergency expenses or a loss of income during the loan repayment period. Smart people don’t leave much to chance.
6. Have you considered the combined expense of rent and EMI; in case the house is still under construction?
If the home is still under construction when you start the repayment, remember to consider the total expense of an EMI plus the rent you will pay for the house you are staying in. In case you can’t afford both together, it would be smarter to wait and try to either increase your income or look for a house you can move into as soon as repayment starts.
Buying a home is a critical decision. Be smart and play it safe by ensuring that you understand how much you can really afford.