House buying Rule: 3/20/30/40! – Subramoney

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So you want to buy a house? I had done such a post long ago. Here is a formula which I have arrived after a long time as a finance professional. Most of these rules were part of the mortgage business in the 1980s and even 1990s. However as the greed of the lender (and the borrower) increased, these rules were forgotten. Here is just a reminder.

If you follow this rule, you may buy a smaller house (or in a more distant suburb – price depends on location as we all find out in life) but you will surely have a more peaceful possession and live a life of less stress. That is a guarantee. Many people realized recently that their house was too big a committment – and the car added to the misery.

What are the rules? “3” in the rule stands for the total cost of the house. It should not exceed 3x your annual income. So for a person earning say Rs. 10L, the house cost should not be more than Rs. 30L. Of course this is very difficult to buy anything in big cities. However, if you do not have any other property to sell (like land), no support from your father, etc. you should live on rent, till your income increases or you shift to a smaller location where you can buy a house for Rs. 30-35L. Assuming that the husband is earning Rs. 9L and the wife is earning Rs. 5L, then the budget can go up a little – but it means both of you cannot leave the job till the loan is repaid. If both are earning equally, then try to live on one person’s income, and use the other person’s income for a quick repayment.

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The next one is “20” – keep your mortgage to 20 years or less. Obviously, the lesser the better – you pay less interest if the loan is smaller, and for a shorter period. So if you can afford the EMI for a 17 year loan, make it a 17-year loan. The only exception is if you are a good and disciplined investor. In such a case you could take a 30-year loan and INVEST aggressively.

The next is “30” – make sure that the EMI that you pay (including all other EMI) is about 30% of your income. So for a person earning say Rs. 7L per annum, his annual instalment should be Rs. 210,000 – Rs. 17,500 – say Rs. 20,000 per month! This means a loan of about Rs. 20L. Of course if you are seeing all these figures in Mumbai or Delhi, you might be wondering where such flats are available. Well it has to be beyond Mira Road or Ulwe. Best, is to rent till you have accumulated money to buy a house.

The last number in the rule is “40” – the minimum down payment that you should make while buying a house is 40% of the cost of the house. Mortgage companies will tell you that the minimum requirement is 10%. Ask them what was the rule in 1984?

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Please understand the rule in its entirety – maximum 3 times, maximum 20 year loan, maximum 30% of ctc should be the emi, and MINIMUM 40% should be the down payment!

Do your math, happy to take your queries and comments! Do watch the video link provided.

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As a professional trainer, Subra trains a lot of people – corporate employees, promoters, non-finance managers, fund managers, entrepreneurs, life insurance agents, journalists, PR agencies, and anyone who wants to learn. His style is simple – He tells stories of real people, real experiences, and breaks down complicated topics into easy to understand lessons.
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