If you still don’t own a house, chances are that if I ask you whether you want to buy a house, you will say ‘Yes’.
But no matter how strong your desire is, you need to back it up with the money. And there is a way to this madness of deciding when to buy a house.
Here is how you can check your readiness to purchase your first house.
There are two factors at play here, namely down payment capacity and EMI serviceability. Let’s discuss these 2 in detail
Can you bring in 15-20% as down payment from your side?
If you plan to purchase a flat/apartment/house on a home loan, then the lender wants you to bring some of your own money on the table as well. And rightly so. They want you to have some skin-in-the-game as well.
And how much?
At least 15-20% of the overall cost.
So suppose you want to buy an apartment of ₹75 lakh, then you need to bring in about ₹12-15 lakh as a down payment. This can come from your savings or from wherever you can get that money from (generally from family, friends, etc.).
The remaining 80-85% of the cost, which is ₹60-63 lakh will be provided by the lender as a home loan.
But what if you do not have ₹12-15 lakh available with you for down payment? And you are unable to get it from family and friends too?
In that case, the bank will only lend you a lower proportionate amount to the tune of what you can actually bring as down payment.
So say you are only able to bring in ₹7-8 lakh, then the lender will consider this as 15-20% down payment and recalculated 80-85% accordingly. In this case, it comes to about ₹32 lakh. So you are forced to reduce the budget for the apartment from ₹75 lakh that you thought to ₹40-45 lakh ( ₹8 lakh your down payment and ₹32-35 lakh in bank loan)
Now let’s see the second factor.
We still continue with our ₹75 lakh apartment example.
And let’s say, you use your own savings and take a bit of help from your sibling to arrange the required ₹15 lakh down payment.
Now comes the EMI.
Banks generally have this internal guideline to give a loan of an amount so that the borrowers EMIs (all of them and not just home loan’s) is not more than 40-45% of the borrower’s monthly income.
So for the ₹60 lakh loan, how much will your EMI be?
For a 20-year loan tenure (and at 8.5%), it will be about ₹52-53,000 per month.
So in the eyes of the bank, this EMI amount of ₹52-53,000 should not be more than 40% of your monthly income. That is, your monthly income should be about ₹1.3 lakh per month or more.
If your monthly income is less, then using the 40% loan rule, the bank may ask you to increase the down payment or ask you to bring in a joint borrower (like your spouse with income).
So that is how these two factors are used to decide your actual house purchase readiness. You may feel that you can do it anyhow even if you don’t have the finances (as discussed above) to support the decision. And you might. But when it comes to prudent financial decision making, you should objectively assess your house purchase readiness so that you are not under undue stress to purchase the house and then service the loan.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.