What portion of your salary should you spend on loan EMIs?

Buying one’s own home is a dream that we all cherish. However, arranging finances for the purchase, which most often involves taking out a large home loan, is a difficult task for most people. Though the housing market has remained subdued over the past several years, many home buyers find properties beyond their reach despite the prevailing low interest rates in the economy making home loans affordable for middle-class buyers.

The challenge most often is arranging the down payment which is your contribution along with the loan amount. Banks or housing finance companies insist that you bring in at least 20 percent of the house price to the table before availing a home loan. Here’s how to arrange for the money if you are falling short of funds:

Liquidate assets

If you have already invested in financial assets such as stocks, mutual funds, fixed deposits and bonds you can consider liquidating some of them to raise the necessary money. Look for relatively liquid assets and check the tax implications before placing sell orders. While selling your investments, you should first estimate what will be the in-hand corpus after accounting for exit loads, premature withdrawal penalties, transaction costs and taxes.

If you have other assets which you can do without and can be sold, such as gold, an extra vehicle or financial assets, they can be sold. Many of these assets depreciate or require maintenance expenditure. You can sell some of them, especially cars, and realise the best price.

Avail another loan

This may appear to be the easiest way for many. You can avail personal loan to meet the down payment. These are easy to apply and are disbursed in no time, especially if you are working with a reputed employer. However, there is a catch. These loans come with lower repayment tenure and high rate of interest which leads to high EMI. When you go for a home loan later, your lender can see a personal loan EMI in your credit report. That brings down your borrowing capacity. Most bankers would like to restrict lending to the extent that the EMI does not go beyond 40-50 percent of the monthly take home income. Hence such loans from banks and their implications on your home loan borrowing capacity should be carefully considered.

Borrow on soft terms

You can always approach your friends and family if you are on good terms. Such borrowings are generally on softer terms and longer repayment period which can make you comfortable in meeting the home loan EMI during the initial years. However, ensure that you keep re-paying the sum borrowed as per agreed timeline. These are your lenders of last resort and never rub them on the wrong side.

Save money gradually

However, it is best to be self-reliant and build your own corpus for the down-payment. If you intend to purchase a home after a few years, you must start setting aside a part of earnings in the home purchase bucket. If you plan to buy your dream home within the next five years, then it is better to stay away from risky investments such as stocks and equity mutual funds. It is better to keep the money in safer avenues such as recurring deposits, fixed deposits and bonds. You may also consider some allocation to conservative hybrid mutual fund schemes.
While you start planning for the home purchase, define your goal clearly. You should be clear about how much money you would need and have a definite plan of how to arrange it. Do account for inflation in house prices as well. If you save regularly, there is a fair chance that you will reach your goal of having a decent corpus for your dream home’s down payment.