EMI for Home Loan- How Much You Can Afford? Check Here!

Home loans come with a high amount; which consequently leads to high EMIs. EMIs or Equated Monthly Instalments needs to be paid until the end of the repaid tenure. The biggest question that a customer needs to answer before applying for a home loan is the affordability with regards to its EMIs.

Why is it difficult to find out the right EMI for an applicant?

Applicants tend to go for a higher loan amount when an ideal property comes along; which leads to higher an EMI. They overlook the question of whether they will be able to repay it. it is difficult to figure out the right EMI owing to the uncertainties of work and life. An individual’s salary might change with advancements in the career. An EMI which costs 40% of the monthly salary at the moment might cost only 30% in the future. The expenses keep fluctuating due to life events such as marriage. Some financial goals may be added which might increase the expense even further. With so many uncertainties about the cash flow; it is extremely difficult to arrive at the right EMI for an applicant.

How do financial institutions solve the EMI problem?

Lenders have come up with a way to figure out the right EMI for an applicant. While calculating a borrower’s eligibility, financial institutions ensure that the loan can be afforded by the applicant. Therefore, they calculate the EMI in such a way that it does not exceed 40%-50% of the applicant’s take-home salary.

How can borrowers prevent financial causalities?

While this is mandatorily done by all the lenders; the other half of the responsibility lies with the customer. Nobody knows how much they can afford more than the applicant himself/ herself. Banks have no idea about the customer’s expenses. The applicant must thus make sure that the loan doesn’t become a burden himself/ herself. Sometimes, a high portion of the take-home salary is consumed by the expenses. In such cases, investments for the other goals must be compromised if one takes the loan. And as home loan is a long-term commitment; gaols must be compromised for a very long time. Therefore, applicants must choose the right EMI.

Ideal EMI calculation

Borrowers should strive to invest a minimum of 20% to 35% of their income every month. Once the investment percentage is clear; applicants can then work backwards to arrive at the EMI level. Given below is an example of an ideal EMI calculation:

An individual invests 25% of their take-home income for high priority goals. 30% of the in-hand salary goes into maintaining the expenses. This customer can avail for a home loan with an EMI of up to 35% of the salary. The other 10% must be kept as the buffer which will be useful for unplanned expenses or changes in the EMI (in case of the floating interest rate).
i.e., Take home salary= 25% (investment)+ 30% (expense)+ 10% (buffer)+ 35% (EMI)

Borrowers must use this information while calculating the EMI via an EMI calculator. Applicants must keep in mind that unlike in the case of investments; compounding works against their favor and in the favor of the lender in case of a loan.

How to choose the tenure correctly?

Tenures are an important factor that determines the affordability of the loan. Since EMIs are inversely proportional to the tenure, a longer tenure decreases the EMI. However, longer tenures increase the total interest payable. Therefore, applicants must avoid choosing an extended tenure as far as possible. Applicants can see the consequences of the tenure on EMI and interest payable on the home loan EMI calculator.

Things to remember while choosing the EMI

Here are some points that applicants must keep in mind while choosing an EMI:

Applicants must make sure that their investment should not suffer beyond a point due to the loan.
A buffer must be kept since the interest movements may take EMI higher.
Pre-payments must be maid regularly as much as possible.
If a loan is not affordable, applicants must deliberate on whether they must opt to buy a property or rent one.

Customers who can’t use the house using a home loan must not stretch their budget to go for one. They can rather opt to stay on rent. Those who are uncertain about their career and unable to purchase the home loan at the moment must plan for it wisely till the loan becomes affordable. An EMI loan calculator can be used to plan wisely. Such customers can increase their ability by setting a goal and savings accordingly. While increasing the ability to purchase a home, some people have the question on whether they should buy one early or leave it till late in their career. Here are some points that can help sort out this question.

Points to consider if one opts to buy a house early

Borrowers who buy a house early in their career will be debt free relatively early in their life. They will have the choice to choose a comfortable tenure for themselves. They can provide a sense of financial and emotional security to their family. Owing to the increasing cost of properties; some people might be unable to purchase one in the future. However, a major portion of the salary might go towards this EMI, forcing one to compromise on other investments and goals. Also, people tend to shift their careers at a young age which increases job certainty. And it is of no use to purchase a house and having to move to another city for a job.

Additional Read: How to decide an ideal home loan tenure & EMIs?

Points to consider if one opts to buy a house later in their career

EMIs may be affordable with a higher salary. Also, by then an individual will have much better clarity about the type of house and the location where they want to buy the house. However, all the plus points of owning a house early in the career are missed here.

In addition to keeping all these points in mind, applicants must make the maximum use of an EMI calculator to check the affordability of the home loan.

Author Since: Jan 17, 2019

Anoop Bansal, a professional Chartered Accountant based in the National Capital - Delhi. I have worked for the top-notch Indian and International banking firms for the past 10 years. Currently, I work at emi-calculator.loan blog and a financial consultant for different SMEs in India. Follow me on Facebook, Twitter and Linkedin for more information.

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