Choosing Wisely: Should You Allocate 50% of Your Salary to a Home Loan?
The decision to allocate a significant portion of your salary towards a home loan is a complex one that varies greatly from person to person. While some argue that it's advisable, personal experience suggests that this route can become financially challenging over time. This article aims to provide a balanced perspective, weighing the pros and cons of allocating 50% of your salary towards a home loan.
Your Personal Experience: At any cost, allocating 50% of your salary to a home loan is not advisable. Utilizing my personal experience, I can say that when expenses increase and lifestyle changes, but salary increases are not proportionate, one can find themselves in a dire financial situation. This can be likened to trying to run a marathon while wearing a brick wall around your neck. It took me three years to navigate my way out of this challenging financial situation through intricate financial planning.
Creating an Asset for the Future: It is absolutely advisable to allocate a portion of your salary to a home loan. When you invest in a home, you are constructing an asset that is likely to appreciate in value over time. Additionally, you can benefit from reduced tax liability by making home loan repayments, which can provide significant savings.
Initial Pinch, Gradual Relief: While a 50% deduction from your salary might seem difficult for a couple of years, the percentage of your monthly income that goes towards the loan will decrease over time as your salary grows. For instance, if your salary is ￡50,000 and your EMI burden is ￡25,000 for 20 years, the EMI/NMI ratio is 50. However, as your salary increases, say to ￡75,000 per month, your EMI/NMI ratio will drop to 33, indicating that you are not blocking 50% of your net monthly income for the entire loan tenure. It is only the initial phase that can be financially challenging.
Additional Income Streams: If you purchase a "ready to move in" flat, you might be able to rent it out, thereby adding to your income. Alternatively, if you move into the house, you may reduce your monthly rent expenses.
Based on the above analysis, it is a perfectly logical investment. However, it is crucial to be aware of the potential challenges and to ensure that you have a solid financial plan in place.
When considering a home loan, ensure you choose a reputable lender. For instance, SBI offers loans at affordable rates starting at 8.50%.
Regardless of your decision to allocate a significant portion of your salary to a home loan, it is important to remember the following:
N1: Loan Eligibility: Banks typically calculate your eligibility based on the guideline that not more than 35% of your income should go towards EMIs. This is to ensure that you can comfortably handle monthly payments.
N2: Inflation and Expenses: As your life changes with marriage, children, and higher education, expenses can escalate. Even though your income might increase, inflation often outpaces the increase in your salary, creating a financial strain.
N3: Contingency Fund: Providing for a contingency fund is essential to cover unforeseen situations that life may present. A dedicated fund ensures you have a financial buffer for emergencies.
N4: Family Growth and Insurance: As your family grows, it is advisable to increase your insurance coverage to ensure that if unforeseen events occur, you and your family are financially protected.
N5: Higher EMIs and Property Expenses: Allocating a higher percentage of your salary to EMIs means you will be taking out a bigger loan and purchasing a larger property. This results in higher property taxes and maintenance costs.
N6: Tax Benefits: While higher EMIs can provide some tax relief, the benefits are limited. They do not always justify the high EMI burden.
N7: Shorter Duration vs. Stress: If your goal is to have a shorter duration of your loan, you might end up losing out on the tax benefits and increasing your financial stress by paying higher EMIs.
To conclude, the decision to allocate a significant portion of your salary to a home loan should be made with careful consideration and a solid plan in place. Ensure that you strike a balance between your financial goals and your ability to manage the monthly EMIs over the loan tenure.