Express news service
So you want to buy a house? Here is a formula that I arrived at after a long time as a financial professional. Most of these rules were part of the mortgage industry in the 1980s and even 1990s.
However, as the greed of the lender (and the borrower) increased, these rules were forgotten. Let this serve as a reminder.
If you follow this rule you can buy a smaller house (or in a more remote suburb – the price depends on the location as we all find out in life) but you will surely have a more peaceful possession and live a less life. stressful. It is a guarantee. Lots of people recently realized that their home was too much of a commitment – and a car only added to the misery.
So the formula is 3/20/30/40, but what are the rules? “3” in the rule represents the total cost of the house. It should not exceed 3 times your annual income. So, for a person earning say Rs 10 lakh, the cost of the house should not exceed Rs 30 lakh.
Of course, it is very difficult to buy anything in the big cities. However, if you have nothing to sell – like stocks, property, and you don’t have the financial support of your parents, then you should get a place to rent, until your income increases or as you move to a smaller town / place where you can buy a house for Rs 30-35 lakh.
Assuming one spouse earns Rs 9 lakh and the other Rs 5 lakh, then the budget may increase a bit – but that means you cannot quit your job until the loan is paid off. If both earn the same salary, try to live on one person’s income and use the other’s income to pay off the loan quickly.
The next one is “20” – keep your mortgage for 20 years or less. The lesser the better – you pay less interest if the loan is smaller and for a shorter period. If you can afford the EMI for a 17 year loan, so be it. The only exception is if you are a good disciplined investor. In such a case, you could take out a 30-year loan and invest aggressively and intelligently. In the long run, it could be rewarding.
The next one is “30” – make sure that the EMI you pay (including all other IMEs for your car, personal loan, etc.) is about 30 percent of your total income. So, for a person earning say Rs 7 lakh per year, the annual payment should be worth around Rs 210,000, which equates to Rs 17,500 per month. This means that this person could take out a loan of around Rs 20L for 20 years.
Of course, if you see all these numbers in Mumbai or Delhi, you might be wondering where such apartments are available. Well, it must be beyond Mira Road or Ulwe. Your best bet is to rent until you have accumulated enough money to buy a house. The last number in the rule is “40” – the minimum down payment you have to make when buying a home should be 40% of the cost of the home.
Mortgage companies will tell you that the minimum requirement is 10 percent. Ask them what the rule was in 1984. Again, for clarity, here is the rule in its entirety – maximum 3 times, maximum 20 years loan, maximum 30 percent of the CTC should be the EMI, and minimum 40 percent should be the down payment.
PV Subramanyam Author and CEO: Subramoney.com
