Buying a home could easily be one of the biggest purchases many of us will make in our lifetime – and if you have taken a housing loan to fund your dream home, you’ll likely be paying it off for years, even decades maybe! But did you know there’s also such a thing as spending too much on a house? You could be left with little money for other goals in life, such as retirement, education funds, vacations, or your passions.
Rule of thumb
While it’s not set in stone, the consensus from financial planners and experts suggests that expenditure on property loans/rent must not exceed 40% of your income. Most lenders will calculate this for you based on your income size, income stability, credit score, down payment size, and other factors; but don’t let them make you bite more than you can chew.
Crunch your numbers before you even start looking for a home so that you are aware of your budget – which will also make it easier for you to shortlist your home buying options.
How to go about crunching numbers then?
Calculate your true expenses for every month. It’s one thing to assume, but it’s best to get a pen and paper and get down to business. List every expense – small or big, and see how much you can realistically pay towards your home loan EMI without significantly compromising you or burdening your interests.
Use a Home Loan Calculator to estimate your EMI and how much interest you would be paying. Compare various home loan interest rates from different banks and select low-interest home loans– they can save you a lot of money in the long run.
Don’t forget home loan insurance costs, property taxes, stamp paper duties (5-8% of the total cost), and monthly maintenance fee if you’re buying an apartment or moving into a planned community. There’s also repair and maintenance costs for as long as you own the home.
The plus side
Having our own house helps you save on tax and rent (which once paid, never comes back). The EMI amount remains pretty much the same while your income increases year on year, so you’re going to be in a better position five years from now. The property value will also grow.
If you’re young and don’t have too many financial responsibilities, part-paying the loan is a great way to reduce the overall loan amount.
Most lenders offer part-payment facilities at little or no extra cost. In the initial years, the interest component of your housing loan will be higher and helps you reap tax benefits, so making part-payments after 5-7 years could work well.
Remember, it is important that you save the rest of your money for personal goals and expenses – maybe save up for that vacation you have been wanting to go to? A little for your kid’s college education, and some for your jolly retirement days. Planning plays a very important role in general wellbeing. While it’s great to have your own home, it’s equally important that you are not burdened by heavy EMIs.
