07 JULY, 2022

When you are applying for a home loan, you need to consider its impact on your finances over the long term. A home loan is a long-term commitment, 15 to 20 years, and would require you to use a significant chunk of your salary every month to pay the Equated Monthly Instalment (EMI) throughout the loan tenure. This means that once you apply for a home loan, going forward, a specific percentage of your salary will go towards the home loan EMI and then you will have to meet your remaining expenses and savings and investing goals accordingly. Hence, it’s crucial to consider what percentage of your salary should be accounted for your home loan EMI before you apply for the loan.

The ideal percentage

As a rule of thumb, your home loan EMI should not exceed more than 35% to 40% of your income. The primary reason for this is that you need to meet a host of other expenses and you should have some breathing room. If you put too much of an EMI burden on your income, say 60%, it might become hard for you to meet other financial obligations. In such a scenario, you may either default on your home loan EMI or you may be forced to take unsecured loans like personal loans and credit card loans.

Ideally, all your loan EMIs, home loans and EMIs of other types of loans that you may have should not exceed 40% of your income. While you repay your debt, you will also need to take care of other important financial aspects such as saving for retirement, investing to meet short-term and long-term goals, building an emergency fund, etc.

Things to keep in mind

  • Depending on your income, age, life goals, lifestyle, etc., a percentage that is ideal for you may be different. Hence, you shouldn’t just blindly follow the 40% marker and you should look at your income and expenses figure.

  • You also need to consider your career and income advancement. As your income increases, you may be able to afford a higher EMI. But at the beginning, you should not overextend yourself. You should also consider the possibility of career stagnation or job loss.

  • When considering your income, look at your stable income that is guaranteed and do not account for additional income that is unstable. For instance, if you have a full-time job and you occasionally tend to freelance too, don’t consider your freelance income when determining the percentage of your income that should go towards your home loan EMI.

  • Since the home loan tenure tends to be long, there is a possibility of home loan interest hikes in the future. This may change your EMI and make it higher. Hence, you should keep some room for that as well.

Use a home loan calculator

Before you apply for a home loan, make sure to use a home loan EMI calculator. This helpful online tool will give you an idea of what your home loan EMI obligation will look like and how you can financially plan for it. You can also try different home loan tenures for the same home loan amount that you require to get different EMI amounts to see which fits you the best.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.