TomorrowMakers

Finding a right home is not a bigger challenge for women but planning and managing your finance is

How to financially plan for your first house

Globally, women continue to drive change, proving that gender equality does not require the need to create any special space. The playing field has been levelled to an extent, and women are increasingly finding their feet as they make decisions and take actions that were not common earlier. 

If you are a woman, possessing your own home certainly counts as one of the biggest milestones. A rented place can never match the comfort and security of having a home of one’s own. A personal space completes and complements your success. Given the deluge of options, the challenge is not in finding the right home, but in working out your finances to get the home of your dreams. 

Here’s a quick look at the right moves to make if you are planning to buy your first home.

Fixing the ideal value of your new home

This is the main reason for indecision and wrong decisions. Truth be told, there is no fixed figure that can be considered as an ideal value for buying a home. The sole determinant is your ability to make the upfront payment and pay the EMIs throughout the loan tenure. So, you will need to work backwards to arrive at an appropriate figure.

What EMI amount can you afford?

The total value of all your EMIs should not exceed 50% of your income, with the home loan EMI component capped at a maximum of 40% of your total income.

What’s a suitable loan tenure?

The next consideration should be your age and planned earning ability. For instance, if you are around 30, you should not be looking at a 30-year loan tenure. A more practical option would be to clear the last of your EMIs a few years before retirement age. This would make a tenure of 20 to 25 years more suitable.

How to calculate the ideal value of a home?

  • Let’s assume your monthly remuneration is Rs 80,000
  • 40% of Rs 80,000 = Rs 32,000 towards monthly EMI
  • 20-year tenure = Rs 32,000 x 12 x 20 = Rs 76,80,000

Related: How to carry your vote to your new home?

Working out the down payment

Now that you have a figure to work with, it is time to look at the upfront payment. Typically, home loans are capped at 80% of the value of the home. That means you need to make an upfront payment of 20%. A little reverse calculation with standard home loan interest rates for the above EMI and loan tenure shows that the loan amount will be 35 lakh and the down payment 9 lakh.  Effectively, you will need to raise around Rs 9 lakh as a down payment. This can be a challenge for some home buyers. 

If you are looking for ways to handle the down payment, there are options available. Let's take a look at some of the options.

  • Choose a home loan with 15% down payment: Some lenders offer loans with 15% down payment. This will bring down the amount considerably. In other words, you will only have to put together Rs 6 lakh instead of Rs 9 lakh.
  • Withdraw EPF savings: Salaried employees with contributions to EPF for five years or more can withdraw up to 90% of their PF corpus.
  • Take a gold/HDP loan: You can take a secure loan against gold, or get a home loan down payment loan extended by an NBFC. (Remember, this loan repayment plus all other loan repayments should not exceed 50% of your total income). In case this pushes the repayment liabilities beyond 50%, consider reducing the home loan EMI by lowering the total value of the home you intend buy.
  • Save for a few more years: If none of the above options work for you and you are still short of funds, your best bet is to start saving. Plan on buying your home a few years down the road and start saving diligently. By setting aside Rs 10,000 per month in a systematic investment plan (SIP), you can expect your corpus to grow to around Rs 7 lakh in 4–5 years (depending on the investment and how well it performs).

Related: How my life changed when my kids left home to lead their own lives

Choose the right home loan

Opt for a home loan that gives you a certain degree of flexibility. There are various eligibility criteria that you need to fulfil. For instance, you must have been in employment for a minimum of 2 years, and have a credit score of 750 or above. Most home loans have interest rates above 8%, with separate processing fees. All our EMI calculations above are from the repayment angle. This means that the actual loan amount you receive will be lower than the amount you end up repaying at the end of 20 years. 

In effect, you need to work out your repayment plan, save up, or create a corpus for your down payment before you can choose the ideal home loan. Finding a dream home within your budget won’t be a problem, given the number of options currently available. Look at these budgeting basics if you are moving out of your parents' home.

Note: The calculations given above are intended to help you work out a repayment plan and get a approximate idea of the value of the home you intend to buy. All calculations and projections are based on current rates and expected earnings from investments in mutual funds. Increase in earnings have not been factored in to adjust for inflation and the rise in cost of living.

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