Are you looking for your dream house? Have you ever thought about, how much it should cost to maintain a financially happy lifestyle, let us discuss
Have you ever heard a story of someone buying his dream house, later, it turns into the biggest financial blunder of his life. Because he has to work so hard to pay off his EMI, He is not at all mentally free to live in that house or his life beyond working for a lifetime to pay off debt.
This happens to a lot of people when they go out of financial limits to purchase an expensive house, take emotional decisions without knowing the long-term consequences of it. You have to make hefty monthly EMI payments while compromising on other important things in life, also losing future opportunities to invest.
Ideally, if you are purchasing any house and also, you already have some other loans payments. In that case, your total EMI payments should not exceed 35–40% of your monthly Income. OR
It should be always be within 3 – 4 times of your annual salary.
This limit allows you to meet your basic needs and future expenses such as food, health, education, travel & insurance etc. As Everyone has different financial & personal needs these rule is good for starting and it helps you to maintain your finances.
Now, let us understand it with an example. Sandeep, Earns Rs. Rs. 20,000 per month.
- He has enough savings for the down payment (Normally 20%) of the house value.
- Existing EMI of 1500 per month. (It could be for any existing loan i.e. Student loan, Auto loan, Personal Loan, Credit card loan etc)
Now, calculate the affordability of Sandeep house from the thumb rule of healthy finance. In any case, Sandeep total EMI payments should not exceed 35–40% of his monthly income.
In Sandeep case, He can happily afford a monthly EMI payment of Rs 7000–8000. As he is already paying Rs 1500, He can afford to pay Rs. 5500–6500 for a home loan.
From here, Assuming, Prevailing Indian home loan interest rate of 6.5% per annum up to 80% of property value and common loan payment tenure of 30 years.
With that amount, his ideal affordability limit for his house would be between 10–13 lakh only based on his current financial conditions. It will help him to sustain future increases in expenses. Later, he always has the option to opt for a bigger house as his income increase.
Myth to be understood:
1. You purchase your house only once in a lifetime— No, You always have the option to switch to a new house.
2. Your house is your asset; No, It is not an asset as long as it starts providing net positive cash flow after EMI & Maintenance in terms of equity or cash flow as rent. So choose wisely and invest an extra amount elsewhere to acquire assets instead of an unaffordable housing loan.
Here, in this article, the point I want to convey is that you should always be more careful with your present lifestyle and peace. Your lifestyle will not be drastically changed even if you opt for a little bigger house than the one you could afford comfortably. However, it can easily ruin your day-to-day lifestyle comfort and finance to maintain your life basics. Instead, with that extra amount, you should start investing in the Index funds, your equity will grow drastically and it will provide more freedom to outperform in your career and life. It will eventually lead to you bigger house and a better lifestyle.
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