What Percentage of Income Can Go Towards Home Loan EMI?

A common answer is 35-40% of the net take home salary. If you search on the internet, you will get an answer in a similar range. The banks may also have internal guidelines where they may not let your loan EMIs exceed a certain percentage of your net salary. When it comes to financial planning, the answers are usually not so objective.

The Answer Depends on Your Salary Level Too

If you earn Rs 80,000 per month. Monthly expenses (excluding EMIs) are Rs 45,000 per month. Clearly, the EMI cannot exceed Rs 35,000 per month. You won’t be able to pay an EMI beyond that threshold. 44% of salary.

If you earn Rs 3 lacs per month. Monthly expenses are Rs 80,000 per month. You cannot pay an EMI greater than Rs 2.2 lacs per month. 73% of salary.

You can see — as your income (or monthly savings) increases, you can afford a higher EMI. I am not saying that 70-75% of your income can go towards EMIs. This is just to show that the threshold set by banks (40-45%) is not right for everyone.

Your Life Is Not Just about Buying a House

You must invest for your other financial goals too. Retirement, kids’ education, wedding, parental care, contingencies, travel etc.

Clearly, not everything can go towards home loan EMIs. If everything goes towards EMI payments, you will not have anything left to invest for your other financial goals. How will you fund such goals then?

Hence, while the banks may happily offer you a home loan if your application meets their Fixed Obligation to Income Criteria (FOIR), you must still take a call.

Related Article: How Much Home Loan EMI Can You Afford?

When Do I Buy a House Then?

This is a very difficult question to answer. If you can’t afford to purchase a house now, when will you buy one?

Your goals are not going away in a jiffy. For instance, you will need to invest for kids’ education for a long time. House prices may also not remain stable and may rise. So, if you can’t buy a house now, how will you ever buy one?

I don’t think there is an objective answer to this question. Unfair and impractical on my part to suggest not to buy and stay on rent. Forever? Won’t sound pragmatic to most, especially if there is no ancestral house to fall back upon.

Here are a few approaches you can take. This is not an exhaustive list.

  1. Focus on your career and try to increase your salary/income over the next few years. You may reach a stage where the numbers will fall in place, and you will be able to both pay loan EMIs and invest for the remaining financial goals. This is the most practical way forward. In any case, you should be open to opportunities to further your skills, career, and income. I also understand that this may not always be an option for Government employees where the increase in income may not be as sharp as for private sector employees.
  2. From my limited experience, I can say that investors/borrowers tend to take the approach as mentioned in (1). They buy a house. Prepay the loan aggressively over the next few years. As the loan gets closed or becomes more manageable, they tend to start planning and investing for other financial goals. It could be the other way round too. You start with financial investments early on in your career. As your income and savings grow and cashflows improve, you can consider buying a house. OR
  3. Wait until the investing for high priority goals such as kids’ education gets over. Once you have accumulated sufficient money for such goals, you can then think about buying a house. However, if you delay too much, you may get a loan for a shorter tenure. Shorter tenure means bigger EMI. OR
  4. Buy a more affordable house. You may not be able to buy a Rs 1 crore house but may have resources to buy a Rs 50 lacs house. As the other financial goals fall off over the years, you can explore ways to sell this house and fund the purchase of your dream house. OR
  5. Prioritize financial goals. If the house is an extremely high priority, then you must be prepared to compromise on other goals. You may mentally prepare your kids to fund a part of their education themselves, say through a scholarship or a loan.

All I share above are rational suggestions. However, purchase of a house is not always a rational/financial decision. There are emotions involved. And when there are emotions involved, people can do strange things (at least in my opinion). Wiping off bank accounts and selling long term investments just to purchase their dream house. And I don’t necessarily blame them. These are aspects of life that you just can’t model in a spreadsheet.

What if you want your kids to grow up in your own house so that every corner of your house has a memory to cherish as you grow old? Or you want a house where your extended family and close friends stay? Microsoft Excel will never be able to price in these emotions.

As I mentioned above, there are no objective answers here. There are certain thresholds in place by banks so that you don’t over-borrow. However, the question is, how close should you get to the threshold?

What do you think? What percentage of your net income are you willing to pay as EMI for purchasing a house? Do let us know in the comments section.

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