So, you've bought a home or planning to buy one. Questions such as : How much loan should I take? How much EMI should I pay? Should I pre-pay my loan? All these questions pop up when you are planning one. Ask me, because I've been through the pain myself. Here's what I recommend.
A 20,000-25,000 home loan EMI is ideal
Commit to paying 20-25% of the total price, as the remaining 75% will be loaned by banks. As a thumb rule, one's EMI should not cross 40% of net take home pay. So if your salary is around Rs 70,000 per month, EMI shouldn't cross Rs 28,000. For a 20-year loan, this comes to around Rs 30 lakh. Add around Rs 10,000 EMI for an additional Rs 10 lakh loan.
Ideally a Rs 20,000 EMI (Or Rs 20 lakh loan) is the best option since the entire amount can be used for tax deduction - Rs 2 lakh home loan interest exemption and principal exemption in Sec 80C investments under Indian tax laws.
Buying a 2BHK vs 3BHK
One may feel the loan EMI will be higher for buying a 3BHK -- it is really tough if the property prices are in crores like in Mumbai or in certain areas of Bangalore and other cities -- but if your salary growth prospects are better, go for a 3BHK.
As the salary increases, EMI burden will reduce and you may not need to buy a bigger home when your kids grow up. Also, when people are young, they have lesser overall expenses and can save on the discretionary ones which otherwise would've been spent. Else, you may have to sell the current house and purchase a bigger one later, which may or may not happen, especially if the family expenses become bigger than the incomes.
Don’t repay the loan early
Home loan interest rates are less than 10% now which is lower than long-term equity mutual fund returns of about 15% on average. This 5% margin over a period of 20 years home-loan term can make a huge difference. To illustrate, if you take 1/5th of the EMI and invest in an equity mutual fund, all the money you pay for your loan over the term (principal plus interest) will be returned to you at the end. Having such a big corpus when you are at end of your career is a real boost. Hence, it is better to keep EMI lower and not pre-pay the loan if it is the only one. You can always close the loan at will, if you have cash with you
Do an SIP for 1/5 of the home loan EMI
As illustrated above, by investing less than 1/5th of the home loan, EMI, you could get back all the money you paid in principle and interest towards your home loan at the end of the term, effectively reducing your EMI to 1/5th of your original amount.
Set up an SIP which automatically deducts 20% of EMI on the same date as that of your home loan. You won’t even notice it, but will be elated when you receive the big fat paycheck at the end of 20 years. Need help? Talk to us
Disclaimer: This article is for educational purposes only and is not an investment advice / financial advice and should not be construed as such. Decisions taken are solely at your own risk. Read disclosures page for more details.