What’s The Maximum Home Loan EMI That You Can Afford?

There are many thumb rules that are used in personal finance and while they might be able to help you take decisions, it is better to look at your specific situation based on your circumstances. This ensures that you are getting the right picture and that it is not upsetting your personal finances.

One such thumb rule relates to the extent of the equated monthly instalment or EMI that a person can afford for their home loan payments. There needs to be a margin of safety or elbow room available for other expenses for every individual to ensure peace of mind. 

The first thing that an individual needs to do is to separate the question of eligibility from that of affordability. The important point about eligibility is that this is based on the parameters that are used by the bank for the purpose of determining the extent of the loan that they would be giving to their customers.

For this purpose, the bank might be considering a higher amount or percentage of the income, so this can go up to 45% or even 50% of the income, but as a matter of prudence, the individual would be better off if they stick to a slightly lower limit based on additional conditions.

This might look a bit conservative but is meant to ensure that there is no problem as far as the repayment is concerned.

Another point that the individual has to keep in mind is that the limit that one is considering for a large loan, like a home loan, is just one part of their entire financial make-up.

It is possible that there are other loans, too, that are present for an individual and that they have to pay EMI for these loans as well. These will add on to the percentage figure here and hence, this will be an extra burden.

The overall situation should be kept under control because often, the total EMI burden reaches a high point that does not leave any extra room for expenses.

Thus, the total EMI burden should be evaluated so that any variation or delay on the income side does not cause a disruption for the individual.

The manner in which the percentage figure of income is calculated by the individual is very important because of the fact that the income figure has to be the net income that they are receiving.

The gross income would include the figure that is present before the deduction for Provident Fund, as well as income tax, and will be a higher figure. The reduction on those two heads could bring the net figure down by quite a bit, and this is the amount that is available in hand in terms of the money present that can be spent.

Hence, this is an important figure and has to be used in the working for the calculation of the total percentage burden of EMI. There can be quite a bit of difference in the base when considered on a gross and net basis. 

One reason why the limit for the home loan figure—as that of income—is kept slightly lower, which can be around 30-33%, is to ensure that there is money available for other uses.

There are also expenses of the family to take care of. A critical part of the planning involves making investments for the other goals that would be present over the life of an individual. This investment is also required for the purpose of building wealth and creating a corpus for future use.

Using too much money in just paying off EMI will not leave adequate amount for wealth creation and this is why a proper balance has to be maintained on all fronts. 

Arnav Pandya is founder of Moneyeduschool.