When buying a home the affordability all boils down to the amount of EMI you can afford. Deciding that is a very important factor, as you would need to pay the equated monthly installments (EMI) for the next 15-20 years. The EMI can go up or down, but it is a long-term commitment.
The first step in determining the maximum EMI you can pay is taking into account your monthly income. Lenders generally look at your income to decide the loan amount and EMI. The amount of EMI you can afford is typically a percentage of your income. A common rule is that the EMI should not exceed 40 per cent of your monthly income. If you earn Rs 2 lakh per month, lenders might consider an EMI range of about Rs 80,000 as affordable.
Existing Debt
If you already have other loans (personal loan, car loan, credit card debt, etc.), lenders will account for your existing EMI payments while determining your loan eligibility. This is because your total debt obligations (existing and new) should not exceed 40 per cent of your income, as it could make your financial situation unsustainable if it is more. So, in the above example, if you have an existing EMI of Rs 20,000, you should ideally have a home loan EMI of Rs 60,000. You may look at paying your existing debt before you take a loan in case you want a more manageable EMI.
Loan Tenure
If you increase your loan tenure from say 15 years to 25 years your EMI will come down. However, that would mean that you have to pay a much higher interest over the entire period of the loan. You may want to extend your loan tenure to be able to afford a bigger house, but before that, you need to analyze your cash flow and long-term financial goals.
Make A Budget
Finally, you need to have a very clear idea of your budget. Have an idea of all the regular expenses, the insurance premiums, and so on. If needs be, see if you can cut down on discretionary expenses. Also, it is crucial to have an emergency fund, because emergencies like a job loss can happen at any time.
Buying a house is the biggest financial commitment of your life. Planning well can help you to own your dream house without straining your finances.
