Owning a Dream Home – PrognoAdvisor

Owning a Dream Home

One of the major goals in life is to own a house or flat. Most often you will not be able to accumulate the entire cost before you go for a house. So a portion of the funds required will be sourced as loan. You should first accumulate ideally 30% of the cost of the house. Then only you should buy a house. Banks usually do not given loan for more than 70 to 80% of the total cost.

Even if you have full amount with you to purchase a house, it is advisable to set aside a portion of that for other investments and take a home loan. There are many benefits in taking a home loan that case. You are not locking up all your money on the house. If have used all your money in buying the house you will find it difficult to manage your cash flows in case of any adverse situation in the future like a job loss situation. Secondly the interest rate of home loan is lower than the returns you can get from long term investments. Thirdly if you have taxable income, you will get tax benefit for the portion of EMI you pay as interest to certain limit.

Next thing you have to look at it is affordability. How much loan can you afford? Ideally your total loan repayments in a month should not exceed 35% of your income. It can go upto 45% of the income, if your expenses are less than 25% of your income. Usually the term of the loan depends entirely upon this. The EMI will be smaller if the term is longer. Suppose you have Rs.50000 as monthly income and is going for a Rs.20 lacs loan at 9.3%p.a interest rate. The EMI will be Rs.25661 for a term of 10 years and the EMI will be Rs.18382 for a term of 20 years. In this case, it is better to opt for a 20 year term. You will not have a cash flow crunch situation and will be able to meet your expenses as well as save for your other goals.

Sanjeev Kumar Gopalakrishnan

Sanjeev Kumar G, an IBS Chennai Alumni, is a Certified Financial Planner (CFP) from India, since 2005. He has 22 years of experience and is an expert in various personal finance areas like portfolio construction, investment research, life insurance and financial planning.

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