Things to consider before taking a home loan

The first thing you'll probably ask yourself when you're ready to buy a house is, "How much can I afford?" To answer this question, you must consider specific financial planning criteria.
Jul 2022
5 mins read
Before you buy a house that appears to be a good deal, learn to evaluate your "affordability” as part of your goal planning. Affordability takes into account your income-to-debt ratio, current real estate market scenario, economic conditions, and lifestyle needs. These determine your expenditure capability and are very important considerations before you opt for a home loan. The following criteria can help you decide if you should take a home loan or not:

Locked-up Funds v/s Flexibility
Money is the first and most obvious consideration. If you have the financial means to buy a house, you can buy one now. Even if you can’t pay it all in one go, most experts agree that you can afford to buy a house if you can qualify for a home loan. A substantial down-payment is preferable as it allows you to pay off the remaining amount in smaller EMIs over time. You can use your remaining funds for other higher return potential investments such as equity, mutual fund, ELSS, global funds, hybrid funds, retirement plans, saving plans etc.

Renting Vs Buying A House
If you have a transferable job or too much work-related travel, rented accommodation might be a better option. With the money saved, you could consider other important investments such as life and health insurance cover. Taking a home loan can be considered at a later stage when your travelling requirements reduce.

Interest Payments
An important factor that comes into play when availing of a home loan is interest payments. What is the rate of interest, and how often would you have to make the payments? Make sure that you can afford to pay as per scheduled without the cost eating into your planned budget.

35/50 Rule
Experts advise Home loan EMIs should not exceed 35% of your monthly income and total EMIs, including car loans and other debts, should not exceed 50%. If you don't have any other loans, your home loan EMIs can reach up to 50% of your monthly income2. This will leave you with enough to build a personal finance corpus.

Loan Tenure
When considering a home loan, you also need to keep in mind the tenure of the loan. This is the period from the date of disbursement to the date of the last EMI payment or closure of the loan. In other words, the entire period over which you will have to make your payments. Make sure to factor this into your planning process before making a decision.

Down Payment
A home loan usually entails a down payment, which is the amount you need to pay upfront when purchasing a house. A down payment covers a significant portion of the total home loan. While a lower down payment may be convenient more immediately, it may mean that your EMI payments will be higher. A higher down payment may also help improve interest rates and terms for the loan.

Tax Benefit On Home Loans
Section 80C of the Income Tax Act, 1961 allows deduction up to Rs 150,000 per year from the principal loan repayment of your home loan3. Additionally, Rs 200,000 can also be deducted from your home loan interest if the loaned property is used as your primary residence . If the property is jointly owned, then each owner can claim Rs.200,000 home loan interest deduction

Additional Charges
Look out for any other additional or hidden charges that are part of the home loan terms, so that you do not incur unplanned expenses after taking the loan.

Lifestyle Considerations
Having home loan EMIs to pay every month can impact other things you may want to spend on, such as planning a vacation, upgrading your home or enrolling for a gym membership. Before taking a home loan, calculate your total cost of living including EMIs from your monthly income. If you are left with less than 10% of your income then you may have to cut back on your lifestyle expenses or consider buying a less expensive house.

Long-term Goals
If you're looking for a home, affordability should be your top priority. However, it's also important to know how long you plan to live there, so that you are not trapped in a home you can't afford in a city you may want to leave.

Financial experts recommend living in a home for five years before selling it.4Consider the costs of purchasing, moving, selling, and packaging. For those who aren't sure where they want to live and what their five-year plan is, it may not be the right time to buy a home. Renting a house may be a better option.

Are you ready to buy a house? If yes, then consider all the aforementioned factors before you make this major financial decision. Do not forget to seek advice from your financial advisor. They can help you choose a good investment plan with a mix of instruments like ELSS, equity funds and mutual funds to achieve your long-term financial goals.

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