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Age 35, drawing 3.7L per month. Should I take 1CR home loan ?
Very confused and scared if I should take the home loan of 1cr at the age of 35 or not. I will also have to invest 50% of my savings towards purchasing the home. Have a family of 4 dependent on me.
There is a relationship between house price and monthly in-hand income based on the amount of down payment, the loan terms, and the percentage of monthly income paid as EMI and any existing loans.
As calculated in detail in this article, Home Loan Eligibility for Joint Applicants: how to buy a bigger house, if you make a 50% down-payment and the bank allows a maximum 30% EMI as a percentage of the take-home pay, then the house you can purchase is worth at most 70.4x your monthly in-hand salary.
In the example here, for ₹3.7 lakhs pretax salary, in the new tax regime, the in-hand is around ₹2.8 lakhs/month. The house they can afford, using the 70x multiplier costs almost ₹2 crores.
Since they are paying 50% as a down payment, their EMI, for ₹50 lakhs taken at 9% for 15 years is around ₹50,000/month. This figure is around 18% of the in-hand income.
Therefore, just by buying a much cheaper ₹1 crore house with a 50% down payment, the investor is well within the safety zone offered by their income.
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How about paying off the loan quickly?
There are multiple strategies to pay off a loan quickly:
In the image above, every time the investor pays off 10%, which in this case is ₹5 lakhs or less, of the outstanding loan balance for a 15-year loan, the tenure reduces by 18.6% or 33 months. So just ploughing the annual bonus into the loan will massively reduce the amount of time left in the loan.
Increase the EMI every year
In the table above, for a 15-year loan, if you step up your EMI by 10% a year, you save 43.42% of the time. So if the investor just increases their EMI by 10% a year, their loan will be paid off in (1-43.42%) * 180 months = 102 months.
What about starting with a higher EMI amount since there is likely room in the monthly budget?
There is always the option of pausing long-term investments and aggressively paying off the EMI from the beginning. Here we will keep the EMI constant which has multiple benefits:
Income will likely increase with time which will allow the family to adjust to a tighter budget now allowing higher amounts to be invested later for long-term goals like retirement
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As discussed in this article, How much EMI do I have to pay for my home loan?, doubling the EMI/lakh from ₹1,014 to ₹2,076, for a 9% loan, drops the total loan duration from 15 years to 5 years. Banks, as per RBI directive, cannot charge extra for prepayments from the investor’s own funds.
If your loan is already running and if any of the checklist items above are incomplete, please pause your long-term investments (e.g. mutual fund SIPs) to:
take additional term insurance and personal accident insurance
Emergency fund will take care of dependents and EMI
Just because a risk exists, it might become true at some point. You lose your job and are put on notice period. The first order of business at this point will be not to panic. It is easier said than done but it is important to keep a calm head to follow the next steps:
Step 1: Any severance pay and full-and-final settlement amount goes into the emergency fund to run the household expenses and pay EMI
Step 2: Resist the temptation to pay off part of the home loan immediately from assets like mutual funds or EPF. That can come later in case you cannot find a job for say 6 months or more
Step 3: If there are any other loans like personal, credit card or car loans, those should be paid off immediately from other assets.
Step 4: If you have been prepaying the EMI regularly, reduce the amount you are paying to your actual EMI and the rest will go into your emergency fund
the house is going to be the primary residence and not an investment. Real estate investment is for the CoastFIRE stage and not before
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This post titled How to manage a home loan if you are worried about job loss? first appeared on 14 May 2024 at https://arthgyaan.com
