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Buying your own home is the dream of every working person. But in the excitement of buying a home, the biggest financial mistake is often taking a home loan more than one can afford. If your monthly net in-hand salary (take-home salary) is ₹1 lakh, banks may approve you a huge loan on paper, but the real question is how much EMI (Equated Monthly Installment) will be safe and stress-free for your personal budget?
According to financial planners and banking experts, it is important to understand the balance of essential household expenses, future investments and emergency fund before deciding the loan EMI.
Banks while determining home loan eligibility FOIR (Fixed Obligation to Income Ratio) That is, let’s estimate the ‘fixed liability ratio’:
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Ideal safe range (35% to 40%): Your home loan EMI on monthly income of ₹1 lakh ₹35,000 to ₹40,000 Should be between. This is the safest zone, in which there is no negative impact on your lifestyle, children’s education or investments.
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Maximum Range (50% FOIR): Banks generally allow EMIs up to a maximum of 50% of your total income (i.e. ₹50,000).
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Impact of other existing EMIs: If you already have an ongoing EMI for a car loan (₹10,000) or personal loan (₹5,000), banks will give you a new home loan only after reducing it. For example, if your existing liabilities are ₹15,000, banks will offer you a loan with a maximum new EMI of ₹35,000 (₹50,000 – ₹15,000).
If your in-hand salary is ₹1 lakh, the safe financial balance should look like this:
| budget category | Recommended Portion (%) | Monthly amount (₹) | Description |
|---|---|---|---|
| Home Loan EMI (Safe EMI) | 35% – 40% | ₹35,000 – ₹40,000 | Secured Home Loan Installment |
| Living Expenses | 30% – 35% | ₹30,000 – ₹35,000 | Ration, electricity, children’s school fees, maintenance |
| Long Term Savings and Investments | 20% | ₹20,000 | Mutual Fund SIP, PPF, NPS |
| Lifestyle and emergency fund | 10% | ₹10,000 | Travel, eating out, medical or emergency needs |
At present if the average interest rate of major banks (like SBI, HDFC, ICICI) 8.50% to 8.75% If considered per year, the estimated loan amount for different tenures will be as follows:
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Tenure: 20 years
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If you choose ₹35,000 Monthly EMI: Approx ₹40 lakh to ₹41 lakh Will get a loan of Rs.
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If you choose ₹40,000 Monthly EMI: Approx ₹46 lakh to ₹47 lakh Loan can be approved.
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25 year period:
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At ₹35,000 EMI: Approx ₹43 lakh to ₹44 lakh Will get a loan of Rs.
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At ₹40,000 EMI: Approx ₹50 lakh You can get a loan of Rs.
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30 year period:
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At EMI of ₹35,000 to ₹40,000 you can ₹45 lakh to ₹52 lakh You can take a loan up to Rs. However, in the long run, more interest goes to the bank than the principal, so a tenure of 20 years is considered the most ideal by experts.
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1. Make at least 20% to 25% down payment: Banks finance 75% to 80% of the property. The more down payment you make from your own pocket, the lesser will be the burden on the loan amount and monthly EMI.
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2. Keep aside emergency fund for 6 months EMI: Before starting the loan, maintain a backup of at least 6 months’ EMI and an amount equal to essential expenses in your savings account or liquid fund, so that the EMI does not bounce in case of any temporary disruption in job or income.
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3. Must take term insurance: Make sure to buy an additional term life insurance cover (Home Loan Term Plan) equal to the amount of home loan you are taking, so that in case of any untoward incident, the family is not burdened with debt.
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4. Adopt a pre-payment strategy: Keep prepaying an additional EMI amount every year based on the annual increase in your income or bonus. With this, the 20 year loan gets resolved in just 12 to 14 years and interest worth lakhs of rupees is saved.