All of us have a dream of owning our own dream home but we always worried about the budget, finance etc if we plan properly sure we can have our own asset without any complexity here is some guidelines how we can budget for our home purchase.
Mr. Krishna likes a two-bedroom apartment that costs Rs 30 lakhs. At a rate of 12 percent, for tenure of 15 years, the EMI for a loan of Rs 30 lakhs works out to be Rs 36,000. How does Krishna plan his finances?
For smooth repayment of your home loan, it is essential to plan your finances well. A home loan debt is a huge financial commitment spread over many years. Taking additional loans like a car loan or personal loan will only make repayments tougher for a borrower. It is advisable to procrastinate any huge expense till the home loan debt is paid off. Those walking on tight finances must not indulge in other loans.
Deciding on a home purchase budget is the first crucial step. Repayments on a very expensive house could be a nightmare, especially in the scenario of increasing interest rates. Figure out how much you can set aside every month towards a housing loan debt, after taking into account your future financial commitments. Then save regularly towards an emergency fund apart from regular investments.
As a thumb rule, a person with a good credit history will be sanctioned a loan amount where the monthly repayment is equal to 30-40 percent of his gross monthly income. The lender perceives lending any percentage more than this amount risky with higher chances of default.
With a monthly income of Rs 70,000, Krishna will eligible for a home loan of Rs 24 lakhs. He can club the income of his spouse who earns Rs 30,000 per month to increase his loan eligibility. Applying jointly will enhance their loan eligibility to Rs 33 lakhs. For a loan tenure of 15 years and at 12 percent interest, their monthly EMIs work out to be Rs 39,000.
Borrowers taking the floating rate option should bear in mind interest rate hikes when planning their finances. Krishna can increase the loan tenure if he is uncomfortable with the amount of money spent towards this debt. It is advisable to borrow as little as possible and raise money from other assets for a house purchase. A large amount of down payment eases your monthly EMI burden significantly.
Taking a huge home loan can even lead you to defaulting. A huge medical bill, or home repair or an expensive purchase should not throw your finances out of gear. In these times of high inflation and increasing rates, homebuyers must exert extreme diligence when preparing the house purchase budget.
Some steps in financial planning:
Determine if you can afford a new home loan debt. A thumb rule is that your overall debt-to-income ratio should not exceed 35 percent. Some lenders ensure that to be eligible for a home loan, the maximum monthly home loan repayment must be less than 30 percent of the monthly income.
Evaluate your comfort level. If you overstretch, repayment may become a struggle. To determine your affordability level, set aside a lump sum every month pretending to have taken a home loan.
INCREASE DOWN PAYMENT
Arrange for down payment of about 10-20 percent of the cost of the house. If you have other assets that are not yielding attractive returns, consider making a higher down payment by liquidating them. This way your EMI burden comes down.
In case of a floating rate loan, make arrangements for paying extra money in the event of rate hikes. Avail tax benefits. Keep in mind additional costs of maintenance, furnishing and other moving-in expenses.
BUILD AN ASSET
The money paid as rent disappears and you do not see it again. A house is an asset that builds up in value and returns manifolds when you sell it.