How Much EMI Can You Afford To Repay Your Home Loan?

Sneha Padmalaxmi bought a home for her parents in Pune in 2010. Back then, the 28-year-old hoped to repay the loan of Rs 55 lakh she took from a bank in twenty years. 

When she took the loan, she had committed to pay back around Rs 20,000 per month. Though monthly payout stressed her a lot, she got used it the first five years of the cycle. But, the time when she got used to planned spending, the interest rate on her loan went up from 10.25 per cent to over 11 per cent.

“The cost of living has gone up since, I last took the loan and it is impossible to hike my monthly payout. So, I chose to increase the tenure of my loan last year from 20 years to 25 years,” she says. 

“The small salary hikes that we had is just about enough to get by with inflation jacking up the prices of everything," she added.

Padmalaxmi is one of many such people who have taken home loans during good interest rate times and are later re-thinking the wisdom.

What is an equated monthly installment (EMI) and how can it affect you?

An EMI is the monthly payout of a loan that is taken to finance a home. A number of factors play a role while deciding the monthly amount that one would be able to pay, without stressing the finances. Many financial experts and planners insist that rather than looking at current expenditure and savings, home buyers should consider future expenses, inflation and other factors too while deciding the monthly amount.

The most comfortable amount of EMI should coincide with the current outflow in the form of rent, if a home is being purchased for occupation. Ideally, a home buyer should leave a certain percentage of the money as savings after an EMI is paid. This will ensure a comfortable financial position even if there are any changes in the external factor. If the home buyer is conscientious enough, these savings can be used to pre-pay a loan, at the end of the year.

When a job is lost…

Sandeep Shirke was a cameraman at a popular news channel and was working there for three years before he took a home loan. The corporation, which also offered the services of tax planning for its employees, pushed many of them to take home loans as it saves tax. In fact, the company also offered bonuses to those employees who took loans and even educated them. Shirke, along with a few of his colleagues took the bait and invested in a property in India.

While Shirke's salary was around Rs 35,000, he took an EMI of Rs 10,000 to purchase a 1BHK home at Mira Road, in Mumbai suburbs.

After two years of paying EMIs, Shirke lost his job after a mass retrenchment at the company in 2009. Not only was Shirke left with Rs 13 lakh as loan but he was forced to fend himself on his meagre savings. “I was stressed for six months before I could get another job. I was able to rein other expenses at home but I dreaded the EMI so much that I could not sleep for days before the first day of the month! I had to borrow money from friends and some brokers,” he said. He also considered selling off the home to repay the loan after a few months, but was saved by a quick job offer. After this, he now saves diligently for a rainy day.

As a practice, banks consider a home loan as a non-performing asset (NPA) if an EMI remains unpaid for six months. 

How to deicide an ideal EMI?

Rihansh Laghate bought a home when the market was at its peak. Things did not go as planned for him either. He purchased a 1BHK apartment in Panvel in 2009 for Rs 15 lakh, and took a loan for about Rs 12 lakh. After staying there for a few months, the living conditions of the far-off Navi Mumbai area did not appeal to his family, which insisted that he move a better developed area, hence, he shifted to 1BHK apartment in Vashi.

Until he was able to find a tenant for his purchased home, he had to undergo the pain of paying the rent and an EMI too. However, he got a tenant after five months. While Laghate had an EMI of Rs 8,000, his first tenant paid him only Rs 5,000. Yet, luck was in his favour as rentals in the areas gradually increased and after five years, over 80 per cent of his EMI is covered by the rent as it went up to Rs 7,000.

“My EMI too went up to Rs 9,200 as the interest rate of my loan initially was 9.5 per cent and it is at 11 per cent now. But, the value of my home also went up considerably,” said Laghate. Though he too was unable to prepay the loan as expected due to inflation and other costs, he is not as stressed as he was during the initial days.

A number of calculations can go wrong while purchasing a home. Yet, an EMI is a monthly outgo that will remain constant over a number of years. A number of odds that can affect future financial status should be considered before taking on an EMI.