DT Personal Finance: Don’t succumb to social pressure. See if you’re ready to buy a house

While social media is full of aggressive debates between buying and renting a house, most Indians in reality want to buy a house. Eventually, if not immediately. And that is a sensible goal to aim for. I may not be a huge fan of real estate but I strongly believe one should own at least a house that can be called a home.

And there is no dearth of social pressure if you still haven’t bought. Your spouse, elders, friends, and colleagues - whether knowingly or unknowingly, might be exerting pressure to make the purchase.

But purchasing a house is no joke. It is probably the biggest financial decision of your life. And you can’t just randomly wake up one day and buy it. You need money, lots of it to even think about it.

So to assess whether you are financially ready to buy a house or not, there are two main factors to consider.

Factor 1 - Do you have a 20% down payment?

If you plan to avail a home loan for the house purchase, you won’t get the full amount. Lenders want you to put in some of your money too. A minimum of 20% of the purchase cost is the downpayment requirement. So, if you plan to buy a house of Rs 1 crore, then be ready to shell out Rs 20 lakh as a downpayment.

Now if you have this downpayment amount saved up, then well and good. But what if you don’t? What if instead of the required Rs 20 lakh, you only have say Rs 14 lakh? In that case, the bank will still apply the same 20% downpayment rule. So, the bank will only lend a proportionate amount as loan which in this case is a loan of Rs 70 lakh. So, your house budget reduces to – Rs 14 lakh downpayment + Rs 70 lakh loan, ie, a total of Rs 84 lakh.

What this means is you are still ready for the house purchase (at least under the first factor), but only for a smaller budget, as you have a lesser amount as downpayment.

Factor 2 – EMI affordability

Continuing with the previous example, let’s assume somehow you are able to manage the Rs 20 lakh downpayment (using your savings and say, family’s help). Now comes the EMI part. Lenders only give a loan amount so that the total EMIs (across all loans) are not more than 40% of the borrower’s income. And this is for all the loans combined and not just the home loan.

So, you are buying a Rs 1 crore house. You managed the 20% downpayment of Rs 20 lakh. Now you need a home loan of the remaining 80%, ie, Rs 80 lakh. What would be the monthly EMI of this loan? It will vary for different tenures but let’s say if the tenure is 20 years, and the home loan rate is 8.75%, the monthly EMI will be Rs 70,697 or about Rs 71,000

Now the bank will check the rule of EMI being 40% of the monthly income. So, if your monthly income is Rs 1.25 lakh, you can’t have EMIs of more than Rs 50,000.

But as per your loan requirement, you need Rs 71,000. Here, the bank will not disburse a Rs 80 lakh loan. It will ask you to either increase your downpayment or increase the tenure, or in the worst case, look for a cheaper house.

I know that you may be confident about your ability to service the high loan EMI. But the lenders will go by the rules, barring slight deviations. They will never approve a loan which is too large compared to the borrowers’ EMI servicing capability. In the case of working couples, they are entitled to jointly take a loan and their combined income is used to assess the 40% EMI rule.

So, these were the two major factors that decide whether you are ready to buy a house.

(Dev Ashish is a SEBI-registered investment advisor and founder of Stableinvestor.com, who provides fee-only investment advisory services)