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

The second wave of pandemic has been a tough one for people. The medical infrastructure came under immense pressure during the peak of the second wave. One of the biggest impacts of the pandemic, since its beginning, has been on the work mindset of people, as well on the health side.

With a large number of companies revising their HR policies to offer work from anywhere as an option for all employees or a large percentage of roles within the company, people are increasingly looking to buy a second home, at a destination of their original hometown or the holiday place they always wanted to settle down in the long run.

The all-time historic low home loan rates have also played a part in creating a demand for second homes. Given the new normal of work from anywhere being here to stay, if you are one of those looking to invest in a second home, here are a few financial considerations and tips that you must factor in your buying hunt.

Get pre-approved for a home loan

Even if you are financially fit, the burden of buying a second home is much higher than buying a primary home. This is especially true if a second home means paying off two home loans. This is where the idea to get a pre-approval on your home loan becomes important. But it is important to do it before catching an eye on a dream home so that you know how much you need to budget.

Once you have finalized the lender, the next step is to seek a pre-approved loan. The lender will run simple errands such as a simple credit check that includes your financial background, assets you hold, and the properties you have in your mind. Even though no lender guarantees the final offer, if approved it has certain benefits and gives the borrower an upper hand. It is also suggested to stick to your existing lender (if any) as they will know your background and investing, making it much easier to get a pre-approval letter.

Also, a pre-approval letter makes your chances better to get the property as the seller will know how serious you are about buying even in these uncertain times.

Choose a loan that fits your income

A rule that the industry advises is to not spend more than 30% of the gross income on a monthly instalment. However, lucrative interest rates can sometimes tempt people to go beyond 30%.

The Indian economy is still dealing with an uncertain future ahead, as a lot depends on how Covid recovery will shape up. As such, you must choose an EMI or total loan amount that keeps your monthly expenses as low as possible.

Also, a second home is not the end, you will be required to take care of other things that come along such as property taxes, insurance, repair costs, and possibly other costs. This is why you need a solid financial plan with a clear understanding of what money is coming in and what is going out.

Start by sticking to the pending limit such, for example, if a Rs 1 Cr home with 80 lacs home loan is the maximum you can afford, don’t stretch it to Rs 1.2 Cr which will come with a higher loan.

Save Cash for Down Payment

Before doing any of the steps above, have at least 30% of the value of your home saved up for down payment. Usually, lenders keep the own contribution around 20% but it is always better to keep the buffer as you never know what kind of property you might like. This is the most important step to cover down payment and closing costs. This might sound a lot and can also feel overwhelming but it’s more straightforward when you have a proper plan. Also, during these uncertain times, it’s always better to be ready with a large financial cushion.

The first step is to know the timeline of buying the house which can be six months or the next one year (don’t rush). Once the timeline is clear, start saving for at least a 20% down payment in cash. This means as the time is less and investing in other things like stocks, or business will be unwise and will affect your goal.