Purchasing a house is usually a milestone in our lives. Finding your dream property can be easy, but the one important thing to consider is the affordability. How much can you afford to pay as equated monthly instalment (EMI) on your home loan? The EMI affordability involves some basic math.
Let us consider your monthly income as Dh20,000. If your monthly outgoing expenses are around Dh12,000, including a house rent of Dh5,000, general expenses of Dh5,000 and other loan or credit card instalments about Dh2,000, you are left with around Dh8,000 per month. This means your EMI on a mortgage loan should be below Dh8,000. Taking the minimum interest rate in the market as 3.2 per cent and down payment of 25 per cent, you can afford a property of Dh1.5 million, which takes around Dh5,400 as EMI.
While calculating your EMI affordability, you must also consider that buying property will have additional expenses, such as home insurance. Apart from that, ownership involves several costs like electrical repairs, plumbing, and much more. So, ensure that you are keeping aside some portion of the monthly income to bear these ownership expenses. Another important factor to be considered is the interest rate. If you opt for a variable interest rate, make sure you can fit the interest rate inflation in your monthly income without any stress.
The increase in interest rate and house repairs can be handled only if you have some savings or emergency funds. The rule of thumb is your mortgage instalment should not go beyond 25 per cent of your monthly income and some part of your income should be saved. These savings will not only help in bearing additional payments but also cover you during unfavourable situations like a job loss, etc.
After all these are considered, you will have a good idea how much you can afford on a home loan. Make sure your mortgage EMI is not up to the hilt, putting you in a position where you cannot fit any extra expenses on your budget.
Your monthly instalments will include the interest rate and the principal amount. Once you are sure about the loan amount you can afford, you can get a pre-approval from banks and start your property hunt.
Nikitha Devi is a senior analyst at Mymoneysouq.com and writes about personal finance, mortgage and technology.