Found a home you love? Before signing the papers or paying the deposit, ask yourself one important question: can you really afford it? With housing costs rising, buying or even renting a home is putting increasing pressure on household finances.Expensive housing does not just make it harder to own a home but also affects your quality of life, limit wealth creation and widen wealth inequality. A recent World Economic Forum report, The Longevity Dividend: The Business Case for Linking Health and Wealth, underlines just how challenging housing affordability has become in India.
Affordability crisis
According to the report’s affordability model, the monthly rent for a representative home in India is equal to 139% of an average individual’s monthly earnings. The monthly mortgage payment for the same home is even higher at 295% of monthly income.However, these figures do not show what the average Indian actually spends on housing. So, how much should you actually spend on your perfect dream home?
33% rule
As housing becomes more expensive, it is useful to know a simple rule that can help you manage your money better. The 33% rule is a simple thumb rule that says your housing costs should not take up more than one-third of your monthly income. This includes your house rent or home loan EMI, along with expenses such as maintenance charges, society fees and property tax.If you end up spending much more than this, you could find it harder to manage your day-to-day expenses, build an emergency fund or save and invest for future goals. In short, the more you spend on housing, the less money you have left for everything else.
Affordability calculators
If you are planning to buy a home, a home loan affordability calculator can help you estimate how much you may be able to borrow.You usually need to enter details such as the loan amount you want, the interest rate, your monthly income and the repayment period. Some calculators also ask about your existing EMIs to work out your loan eligibility.Many of these calculators follow a principle similar to the 33% rule by checking whether your housing costs stay within a manageable share of your monthly income.Keep in mind that these calculators only provide an estimate. Before approving a home loan, banks also look at factors such as your credit score, employment stability, repayment history, age and existing debt.