Here are a few thumb rules to help you while buying a house on a home loan but these may vary depending on an individual's circumstances and need.
Currently, home loan interest rates offered by banks and other lending institutions are at a multi-year low. With a good credit profile, one may get a home loan at an interest rate of around 7 per cent. Considering the real estate prices have not increased over the last few years, this could be the right time to own a home for those living on rent. But, before you take a home loan, there are a few important things to keep note of. The amount of loan that you are eligible to get will depend on various factors, including your current salary income etc. Also, you need to get a fix on other things like the price of the house that you are considering buying. Here are a few thumb rules to help you, but remember these are not carved in stone and may vary depending on an individual’s circumstances and need.
1. What should be the price of a house
As a thumb rule, the price of the house that you are looking to buy on a home loan should not be more than 5 times of your annual income. By doing so, you will be able to service the EMIs comfortably without stretching your household budget.
2. The 35/50 rule
While taking a home loan, the lender will ask you about your existing liabilities including personal loan or car loan EMIs. Banks generally do no lend an amount on which the EMI will be more than 45-50 per cent of your monthly take-home pay.
It’s better to take a loan where the home loan EMI is not more than 35 per cent of your monthly income while total EMI including car loan etc should be restricted to 50 per cent. If there is no other loan, you may go up to 50 per cent with a home loan. This will give you the opportunity to save for long term goals as well. You can add spouse income to enhance home loan eligibility as well.
3. Credit score
Some banks offer a lower interest rate on home loans to those borrowers who have a high credit score. Your credit profile helps in getting a better home loan deal from banks. As a thumb rule, a credit score of 750 and above is considered to be a good credit score by most banks and other lenders.
4. Opt for a shorter duration
The EMI per lakh, for the same loan amount, is less for a longer tenure and higher for a shorter tenure. But, the interest cost or interest burden is just the reverse. If you keep a longer tenure to keep EMI’s low, the total interest burden will be high. As a rule, in order to keep interest cost low, opt for a lower duration of the loan.