What percentage of monthly income should my home loan EMI be?

/ M. Pattabiraman / @pattufreefincal / 1 Comment

Published: September 13, 2015 at 8:13 am

Last Updated on January 1, 2016

How high can my home loan EMI be? What percentage of my gross monthly income can I afford to set aside for servicing my home loan EMI? These are questions that I have often seen in personal finance forums. When I recently saw it at Facebook group Asan Ideas for Wealth, I thought of discussing the issues with deciding a “comfortable EMI” amount.

The house/apartment decides the EMI!

Simple is it not! We can think long and hard, search for thumb rules for a comfortable EMI. All that would get thrown out of the window when we actually decide on the property that we wish to buy. The property decides the EMI. The “comfortable EMI” rarely decides the property!

That comfortable EMI figure = 4o% of monthly income can easily get stretched to 45% or even 50% of monthly income if the ‘right’ property comes along.

Property purchase almost always affects investments

This is what I tell myself: If I ever want to buy a property to live in, the EMI would be 30% of my post-tax monthly income. God willing, only 30% would be my monthly expenses, 30% would be my investments with a 10% buffer.

home-loan-emi

Unless I buy property in the middle of nowhere, I cannot get my EMI to be 30% of my post-tax income. The typical EMI is anywhere between 40-55% of post-tax income. With expenses amounting to 40-45% for most people, there is little to invest. For many, at least initially, the only invest they make is the mandatory EPF contribution!

Renting is better than choosing a small house just to keep the EMI down. So the only way in which the EMI will not affect investments for long-term goal is to postpone buying the house until one ‘settles’ down in a career and until the family is complete. This way, the income would have hopefully increased.

However, the EMI would increase pretty much at the same pace too! In today’s corporate world, no one ‘settles’ down! There is no job security.

Buying early vs. buying late

Many advice to buy asap, clear the loan asap and then focus on investments! Both strategies – buying early or late – have disadvantages.

Buying early – pros 

  • Chance to get a good property ‘cheap’
  • Can live debt free sooner
  • Comfort of owning roof
  • Sense of accomplishment
  • Done duty as provider
  • Better to service liability when young and employable

Buying early – cons

  • EMI would be too high for comfort
  • Not be able to invest enough: retirement planning is the first casualty
  • House would be too old at retirement for reverse mortgage
  • Complications if we need to relocate
  • Early retirement not possible if income does not increase substantially
Buying late- pros 
  • Clarity on where we would retire
  • EMI likely to be manageable and hence loan can be serviced longer
  • Reasonable net worth if invested right and clarity on financial goal planning.
  • The property will not be too old at retirement. Reverse mortgage an option, even if not necessary.

Buying late-cons

  • Not being able to buy the ‘right’ property
  • Taking on liability in middle age
  • Early retirement not possible if investments are affected.
Choosing between buying early and buying late is not so easy! Buying early make sense for those who are well paid, well qualified and employable regardless of economic conditions. Buying late makes sense for those who need to hone their skill sets with experience, so that they would be paid better.
One argues that the future is uncertain and therefore, it is best to buy early. From what I see, paying heed to an uncertainty wrt property ownership, results in an uncertainty wrt retirement planning.
Only a substantial income growth, combined with prudent investing with expenses at bay can bail out those who buy a home early.
Answering,  What percentage of my gross monthly income can I afford to set aside for servicing my home loan EMI?, is not easy.
One must understand the impact of a high EMI on our long-term financial goals. This cannot be done with thumb rules.
Some questions to answer:
If I take on an EMI of X, will I be able to reach my financial goals? Can I make up for investing less now, later when my salary increases? You can use theintegrated financial planning template to understand ‘where you stand’.
If you are already running a home loan EMI, use the Calculator: Prepay Home Loan or Invest? to understand if you should close out your home loan asap or let it run.
End note: It is said that delaying a purchase often provides a better perspective. This is true in my case. With time, the desire to own property has diminished and the desire to grow liquid net worth has grown. So I would recommend not rushing into the decision and understand the impact of a home loan EMI on long-term financial goals.
What do you think?
Do share if you found this useful
We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps