Financial Planning for House: Formula, EMI and Down payment.

Because the house gives you stability in your mind. It is not always about money. If there is gold in your house, sell it. Go and buy penny stocks. It can return you 100 times more. This is not necessary. There are different types of investments.

• Some investments give us less returns.
• Some investments give us more returns.

Investments cannot be made on the basis of returns.

This is how you play lottery. You put all the money in it. You put 1 crore and sell the house. If it doubles, it will be 2 crores.

This is not how it happens. Investment in home gives stability to the mind. It gives stability to the family.

It is important for a person to have a permanent address. Every 11-12 months, your address is changing, every 2 years you are getting it changed on Aadhaar card.

Only that person will know that how he is living on rent. When the landlord comes and says that we are increasing the rent. And he cannot do anything.

Now let's start with the formula. And the formula is:

So what is this 5, 20, 30 formula of buying a house? It is a very popular formula.

This formula simply says that if you are planning any house, first of all, how will you know you can buy that house or not?

What you have to do is check the price of the house. It should not be more than 5 times of your annual income.

For example,

• You earn 50,000 every month.
• Now if you multiply 50,000 by 12, then you get 6 lakhs.
• Now if you earn 6 lakhs annually, multiply it by 5, then the value will be 30 lakhs.

It means that the person who is earning 50,000 or money around it, he should plan a house up to 30 lakhs.

Now if the house you like is of 50 lakhs or 60 lakhs. So only two things can happen.

• The first thing that can happen is either you leave the decision.

Because if you do something like this, then you can get into financial trouble.

• And the second thing is that you have to buy the house that you like. So you focus on increasing your income.

Either you increase your income or you change your decision.Point is very clear.

More than 5 times, the house that is coming above your annual income, don't think about buying it. By doing this, you may get into some financial constraint.

Don't plan more than 5 times of your annual income. You can live on rent. It is not necessary that living on rent is bad.It depends:

• If you have a house in a small village and you want to buy a house.That is okay!

But at some point.

• If you want stability in your life.
• If your job is such that you have to move a lot.

Then you can live on rent for some time.

But buying a house is a big decision. And that decision to make you sort out I'll give you some steps. I'll give you my understanding. Later you can put your own expertise.

The question is: Should we take home loan or not?

Home loan is a big investment. Government also helps you to take home loan.

And there is no better loan than home loan. Business loan is a different thing. You are taking loan to increase your business. I understand that. It is important for you.

Why home loan should not be more than 20 years ?

A home loan should ideally not exceed 20 years for several key reasons:

• Higher Interest Costs: The longer the loan term, the more interest you end up paying. For example, a 30-year loan can result in significantly higher total interest payments compared to a 20-year loan, even if the monthly payments are lower.
• Long Term Financial Commitment: Extending the loan beyond 20 years locks you into a financial commitment for a longer period. This can limit your financial flexibility and prevent you from saving or investing for other goals like retirement or children's education.
• Slower Equity Build-Up: In a longer loan term, a significant portion of your payments during the initial years goes toward interest, which means it takes more time to build home equity. A 20-year loan allows for faster accumulation of equity, improving your financial standing.
• Interest Rate Sensitivity: Longer loans are more sensitive to changes in interest rates, meaning any variation can affect your overall financial health more severely than a shorter-term loan.
• Impact on Retirement Plans: If your loan term extends into your retirement years, you may face the burden of repaying a large debt when your income could be reduced, impacting your standard of living.

Choosing a shorter loan term, such as 15-20 years, strikes a balance between manageable monthly payments and reducing long-term costs.

EMI should not be more than 30% of your monthly income. If your earning is 50,000 here.

• 50,000 to 30% is 15,000.

So EMI should be 15,000.

If EMI is sitting above 30%

If you are earning 50,000 then you can afford 15,000.

But here.

EMI is coming, from 20,000 to 21,000. Almost 20,000.

Now what to do.

Y ou have other expenses. If you give all the money in EMI then what will you spend on yourself. You have a lifestyle. You have a livelihood expenses. If you stay at home. You will get electricity bill. You have transportation expenses. If you are married. You will have more expenses.

Now what you can do is, if you increase the down payment.

If you increase the down payment. Suppose if you arrange a down payment of 10 lakhs instead of 6 lakhs.

Then the installment of EMI will be reduced. Usually people make 20% as an anchor in their mind but if we make this 20% as 40%.Then we will be sorted.

So you have to think how to arrange a down payment of 40%.

How will that big down payment come?

When you are talking 20% minimum or 40% down payment which is better.

If you are going to buy a house, it's not just about down payment. When you buy a house then you have some extra charges like:

• Stamp duty charges

Now the charges you pay for the stamp paper. If you are a male and you want to register in your name. Then you will have a stamp duty of 7%.

For example, if you are buying a house worth 1 crore. Then assume 7 lakh rupees. That you have to give in the name of stamp duty.

But if you are a female then it will be 5%.

Now comes the point. Where will this money come from? What can you do?

You can start investing from today. For example:

You need 10 lakhs for down payment or you need 8 lakhs. If you invest money in a good index fund. You get a return of 14% from the mutual fund.

For example, on your investments you add 12,000 rupees every month. So after the next 5 years, you will have about 10.5 lakhs.

Now you can do your calculation in this.

• In your down payment 7-8 lakhs will go
• Some of your money will go stamp duty
• Some money will go to brokerage

If you want to add more money then you can increase your investment.

For example, you made 15,000 rupees here it became 13 lakhs. And if you increase the tenure a little. For example, if I make it 6 instead of 5 then it will change to become 17 lakhs.

So the more time you can wait the better it is. If you are young you should start financial planning earlier.

________________________________________________________Thank you !