Deciding how much home loan you should avail depends on how much EMI you can afford to pay for the next few years. So how much EMI can you really afford? There are certain financial as well as personal aspects that you have to consider to determine this. Although we are discussing all these points by keeping only the home loan EMI in mind, you should take all these factors into consideration even while considering EMI payment option for car loan or any other personal loan.
- Income: Your income plays a major role in deciding the amount of EMI that you can afford. Banks generally restrict your EMI into 40% of your monthly gross income so that the remaining amount can be utilised for other monthly household expenditures and any other emergency requirements. Though it is good to be optimistic about rise in your income, it is not advisable to opt for a bigger EMI on the basis of this alone. Opt for EMI amount that will enable you to set aside at least 15% as monthly savings.
- Expenses: While calculating the EMI consider the expenses that you may incur in future (for eg., maintenance expenses, kids’ educational expenses, medical expenses of your family and your parents etc.). High inflation can also result in significant increase in your monthly expenses in future.
- Rate of Interest Changes: When the banks offer easy home loans with reasonable (read comparatively low) rate of interest, it may tempt you to go for a bigger home loan with bigger EMI. You should anticipate the rate of interest to change with time when availing the home loan. What if the rate of interest increases after few years? Can you afford to pay this EMI amount in such a case? So it is better to have some emergency fund and not to live in hand to mouth situation.
- Lifestyle: Your present lifestyle and of course the lifestyle that you would like to maintain in future also matters while taking the burden of EMI payment. If you are ready to cut your expenses on outside food, entertainment and vacations then you can commit yourself for a bigger EMI. Lifestyle matters a lot in making financial decisions.
- Personality: Irrespective of income, the risk taking appetite and the perception towards loan is different from person to person. If you want to get rid of the EMI burden too soon then you would opt for the shorter loan tenure, which makes your EMI bigger, but pays off the loan soon.
Think Before You Borrow
Your EMI, that too one you are going to pay for your home loan is a substantial amount of your monthly budget and it stays with you for next few years. So, before making any commitment with your bank take time to consider all the factors such as your present income and lifestyle, the possibility of increase or decrease in income, your ability/chances in getting another job in case of loss of present job, your future expenditures, retirement plans and goals. Use the EMI calculator to explore various options to make a well considered and informed decision.
Calculate how much loan you can afford.