Figuring out the right home loan size can be a confusing call. BALAJI RAO lays down a few thumb rules
The biggest concern for anybody who is looking to purchase or construct a house or flat is the cost of such an investment and how much loan or EMI can they afford given their present income levels. It is not an easy decision to take.
Let us take the example of Mukundan and Lakshmi. A couple in their early 30s, they ran around for over three months before shortlisting a two-bedroom flat costing Rs. 25 lakh. When they told their friends and family about it, many of them pointed out that they should opt for a three-bedroom flat instead, since their children would need one room and then there would be guests. Confused, the couple checked with the builder about a three-bedroom flat and found that it would cost Rs.30 lakh. Mukundan was aware that his present capacity was a monthly EMI outflow of about Rs. 20,000 and pushing the cost up by Rs. 5 lakh would mean higher EMIs.
Let us check the numbers to see how the equations work out for each option. At an interest rate of 11 per cent per annum, for a loan of Rs. 20 lakh (80 per cent of the Rs. 25 lakh flat), over a period of 15 years, Mukundan will have to remit an EMI of Rs. 22,732. If he takes the three-bedroom flat instead, at the same interest rate and same repayment period, his EMI will become Rs. 27,278 for a loan of Rs. 24 lakh (80 per cent of Rs. 30 lakh). If the tenure is increased to 20 years, then his EMI becomes Rs. 20,644 on a loan of Rs. 20 lakh and Rs. 24,773 on a loan of Rs. 24 lakh. Although the increased tenure means Mukundan will paying lesser EMIs, his total outflow including interest will be much higher. For a period of 15 years, his total EMI outflow would have come to Rs. 49.10 lakh whereas for an extended tenure of 20 years, his EMI outflow will be Rs. 59.45 lakh, which means he ends up paying Rs.10 lakh more for the flat.
It is a difficult dilemma. People generally push themselves for a bigger home, thereby straining their finances. It is important to remember that housing loans are long-duration commitments and during the intervening time, a lot of events could jeopardise the smooth payment of EMIs. Additionally, remitting home loan EMIs will not be the only commitment during the lifetime of an individual. Various other commitments will come up inlcuding unplanned expenses. For all this, savings have to be invested in different financial assets to give the returns that meet these contingencies.
It is best to plan your finances before availing loans. The table given below is a useful guide to arrive at such commitments. If you are able to clearly earmark expenses and investments, including EMI commitments, against your present income, then you cannot go far astray on the loan size you can afford. Given an average individual’s fluctuating economic fortunes, it is prudent not to venture into an uncomfortable zone or very long repayment tenure. Stick to the basics and you won’t repent at a later stage.