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3/20/30/40 Rule: Want to buy a Rs 75-lakh house? This is the pay package you should aim for
- Written by ZeeBiz WebTeam
Published: Zee Business| Updated: Zee Business
3/20/30/40 Formula To Buy House: Buying a home is still a dream for many middle-class people, because owning one requires a significant amount of money. However, home loans have made this dream easier to achieve. But the question is, how much home loan should one take? Well, many people take this decision only after looking at the loan eligibility of the bank. But this increases the burden of EMI later.
So what should people do? Well, a person should buy a home based on their income and take out a loan that they can easily repay within their means. Let's understand with an example:
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How to decide home loan amount?
1/8Suppose you want to buy a house worth Rs 75 lakh, then what should be your salary for this, how much home loan should you take and for how long? Well, there are many formulas available in the market to help you, and the 3/20/30/40 formula is one of them. What is this formula, and how does it work? Let’s find out in this write-up –
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What is the 3/20/30/40 rule for home buying?
2/8The 3/20/30/40 formula helps you balance your finances so that home loan EMIs do not overwhelm your household budget.
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3/20/30/40 Formula Decode
3/8According to the formula,
3 = The total cost of the house you are going to buy should not exceed three times your total annual income.
20 = Take a loan for a maximum period of 20 years, not more or less than that. This is because if you take a loan for a tenure of less than 20 years, your EMI will be higher. On the other hand, if you choose a tenure of more than 20 years (say 30 years), your EMI will be lower, but you will have to pay a lot of money to the bank as interest.
30 = This means that the home loan EMI should not exceed 30 per cent of your monthly in-hand salary.
40 = Make a down payment of at least 40 per cent of the home's price out of your own pocket. If you can afford more, even better.
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Now the question arises that how much salary is needed to buy a 75 lakh house
4/8So, if you want to buy a house worth Rs 75 lakh, then according to the formula, your annual income should be at least Rs 25 lakh (25,00,000 x 3 = Rs 75,00,000). According to above mentioned formula, the in-hand salary will be around Rs 2,08,400.
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Down payment for a home loan
5/8Now, the amount payable for a 40% down payment will be Rs 30,00,000. After this, you will only need to take a loan of Rs 45,00,000.
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Home loan EMI calculation
6/8Now, on taking a home loan of Rs 45,00,000 from a bank at an interest rate of 8.5 per cent for 20 years, your EMI will be Rs 39,052.
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EMI not exceed 30% salary
7/8Now, according to the formula, the EMI should not exceed 30 per cent of your in-hand salary.
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Home Loan EMI
8/8Now, according to the formula, the EMI should not exceed 30 per cent of your in-hand salary. So, 30 per cent of Rs 2,08,400 is Rs 62,520, and your EMI will be Rs 39,052, which you can easily pay and still have enough money left for other expenses and savings. Even if the interest rate increases in the future, you may not have any problem in paying the EMI.
(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
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