Emergency fund in place?
Before even starting to calculate the numbers, you need to make sure that your foundation is in good shape. Amol Joshi, Founder of PlanRupee Investment Services, says, “You first need to make sure that the building blocks of your finances are in place before you commit to such an expense. In addition to creating an emergency financial reserve, you need to cover your family with a term plan and medical insurance. The emergency corpus should be large enough to cover all of your expenses for the next 12 months. This should also take into account the new EMI commitments on mortgage loans. This is to provide an immediate financial cushion in the event of loss of income due to job loss, accident or prolonged illness. Having this stamp when paying off a large mortgage has proven to be essential over the past 18 months.
Deposit too high?
Banks require borrowers to pay 20% of the value of the property up front before agreeing to sanction a loan for the remaining amount. However, you can put a higher amount if you want. For a property priced at Rs 90 lakh, the maximum loan allowed will be Rs 72 lakh, which means you pay Rs 18 lakh as a down payment. Moreover, you also have to pay a few lakhs for stamp duty and GST, the latter only if you go for a property under construction. Together, this expense is a princely sum for the most part. Even so, financial advisers usually suggest going for the maximum possible down payment.
A smaller loan component not only invites lower interest rates and reduces the burden on the EMI, but also reduces total interest expense and allows for faster repayment, Joshi insists. Still, borrowers should not dump all of the accumulated savings into the down payment. When you consider how much savings you have for your down payment, don’t forget your retirement and other essential life goals. Do not withdraw the money set aside for these purposes. Also consider expenses for renovations or furnishing your new home. Then, after having provided for the emergency corpus cushion, what remains can be paid into the deposit. Plus, a large down payment will strain your cash flow, so plan accordingly.
How much NDE will he eat away at?
Another tricky aspect is budgeting for EMIs. Typically, a bank assumes that around 50% of your monthly disposable income is available for repayment. No bank will grant a loan beyond this threshold. This includes your current EMI engagements, if applicable. “Some banks have become aggressive and are ready to go beyond 40% EMI if the borrower meets certain criteria,” said Rohit Shah, CEO of Getting You Rich. But the lender’s internal EMI cap may not be realistic for everyone. For example, if you earn Rs 1 lakh each month and incur expenses of Rs 60,000, then a Rs 40,000 EMI is simply unaffordable. You would live day to day in such a scenario. If you are buying a property under construction, you will likely be paying rent with your EMI. Make sure you can afford it even if the bank is willing to give you a large loan. Stretching your budget is okay up to a point, as your income will increase, but IMEs will not. But don’t go too far.
A good way to approach this problem is to assume that NDE becomes a reality the very next day, Joshi says. “Imagine that the money will start flowing out of your bank account immediately. Run this simulation in your mind or in a spreadsheet to check your comfort level, ”he urges. Some borrowers are simply sold on the tax benefits that a home loan allows under income tax rules. These deductions, which effectively reduce the cost of the loan over its lifetime, often lead borrowers to make heavy EMI commitments. But these benefits only accumulate up to a certain point, Shah points out. “When you pay off high-interest home loans, the tax benefits are diluted. ”
An individual is entitled to deductions of up to Rs 2 lakh per year for interest payments on home loans. If you pay off a 20 year home loan of Rs 75 lakh at 7% interest, the amount of interest will exceed Rs 2 lakh for several years. Even if you go for a joint home loan with spouse where both husband and wife can claim a deduction of Rs 2 lakh each per year, the deductions are much lower than the actual interest for the first years. So do not extend the EMI mortgage for the sole tax benefits.
For many, there is no doubt that taking home loan EMIs will temporarily put other financial goals on the back burner. You can go several years without saving for your own retirement or your children’s college education. “Given the realities of today’s housing market, most families will have no choice but to save for other purposes,” Shah observes. But that doesn’t mean you have to compromise on other goals. If you can’t plan for contributions to other essential life goals, try to prioritize those goals. Pursue them selectively, like non-negotiable goals like higher education. Alternatively, you can reduce the contributions for the time being. In a few years, as your income grows to allow you to breathe, seriously start contributing to other goals.