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What Percentage of your Salary Should be Accounted for Home Loan EMIs?
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When you are applying for a home loan, you need to consider its impact on your finances over the long term. A home loan is a long-term commitment, 15 to 20 years, and would require you to use a significant chunk of your salary every month to pay the Equated Monthly Instalment (EMI) throughout the loan tenure. This means that once you apply for a home loan, going forward, a specific percentage of your salary will go towards the home loan EMI and then you will have to meet your remaining expenses and savings and investing goals accordingly. Hence, it’s crucial to consider what percentage of your salary should be accounted for your home loan EMI before you apply for the loan.
The ideal percentage
As a rule of thumb, your home loan EMI should not exceed more than 35% to 40% of your income. The primary reason for this is that you need to meet a host of other expenses and you should have some breathing room. If you put too much of an EMI burden on your income, say 60%, it might become hard for you to meet other financial obligations. In such a scenario, you may either default on your home loan EMI or you may be forced to take unsecured loans like personal loans and credit card loans.
Ideally, all your loan EMIs, home loans and EMIs of other types of loans that you may have should not exceed 40% of your income. While you repay your debt, you will also need to take care of other important financial aspects such as saving for retirement, investing to meet short-term and long-term goals, building an emergency fund, etc.
Things to keep in mind
Use a home loan calculator
Before you apply for a home loan, make sure to use a home loan EMI calculator. This helpful online tool will give you an idea of what your home loan EMI obligation will look like and how you can financially plan for it. You can also try different home loan tenures for the same home loan amount that you require to get different EMI amounts to see which fits you the best.
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