Home affordability: How to assess your true purchasing capacity? | Personal Finance
Home prices have risen sharply across India’s biggest residential markets, forcing buyers to reassess what they can realistically afford. Average residential prices across the country’s top seven cities rose 59 per cent, at a compound annual growth rate of 12 per cent, from ₹5,826 per square foot (sq ft) in 2021 to ₹9,260 per sq ft in 2025, resulting in an affordability crisis for buyers, says a recent ANAROCK report. The increase has made it crucial for buyers to assess their purchasing capacity before proceeding.
Make sufficient down payment
Banks typically lend up to 75-80 per cent of the agreement value. They may offer a slightly higher proportion to salaried borrowers. Stamp duty, registration fees, furnishing expenditure and other additional costs are not funded by them. “Buyers often wrongly assume that the bank will fund about 80 per cent of their total cost,” says Arvind Rao, founder, Arvind Rao and Associates.
Buyers should aim for a down payment of at least 20-25 per cent. “A down payment of 30-35 per cent is even better if affordable,” says Vishal Dhawan, founder, Plan Ahead Wealth Advisors. A larger contribution keeps EMI pressure under control. It also protects the buyer if interest-rate hikes lead to an increase in EMI.
Using a personal loan, top-up loan or informal borrowing to bridge the down-payment gap complicates finances and should be avoided.
Keep EMIs within limits
The home-loan EMI should ideally remain within 25 per cent of net take-home income. “All EMIs together should not exceed one-third of income,” says Arnav Pandya, founder, Moneyeduschool.
The appropriate ratio also depends on whether the household has one income or two. “All EMIs together, including the home-loan EMI, should ideally not exceed 40 per cent of one income,” says Dhawan. According to him, using one income as the base protects a couple’s finances if one partner’s income is disrupted.
Don’t overextend tenure
The loan tenure should not extend beyond the borrower’s working life. “Do not extend the tenure to 30-35 years merely to make the EMI affordable,” says Pandya. He warns that a longer tenure increases the total interest paid.
“Borrowers should ideally cap the loan tenure at 15 years, extending to 20 years only when necessary,” says Dhawan. Rao suggests that borrowers who intend to prepay may opt for a tenure of up to 20 years.
Older borrowers should choose shorter tenures as they enjoy lower job security. “They should aim for a 10-15-year tenure,” says Dhawan.
Watch for signs of overstretch
Difficulty in arranging a significant down payment is a warning sign. “An EMI above 50 per cent of net take-home income is a red flag,” says Rao.
Other signs of financial overreach include dipping into an emergency fund meant for job loss or health emergencies, drawing on retirement savings to fund the purchase, and relying on more than two or three borrowing sources — such as a personal loan combined with loans from family or friends.
“Buyers who stretch must test whether they would still be able to afford the EMI after a job loss, a health-related income interruption or the loss of one income in a two-income household,” says Rao.
Protect other financial goals
A buyer cannot default on the home loan or other mandatory housing payments. “An unaffordable housing commitment forces the buyer to cut spending or investments elsewhere,” says Pandya.
High home-loan EMIs could leave little room for discretionary spending such as travel. Depleting the emergency or medical funds could cause additional indebtedness in case of illness. Wealth accumulation, retirement and other financial goals may take a hit. Borrowers may have to delay their retirement.
A constant EMI burden also reduces career flexibility. The borrower may be unable to move to a lower-paying but more satisfying job, take a career break or start a business.
Delaying the purchase and renting preserves flexibility. The prospective buyer can save the difference between rent and EMI, along with costs like maintenance and property tax. A delay can allow the buyer to build a larger down payment and take a smaller loan.
Retain emergency savings
A two-income household should retain at least six months of expenses and EMIs, while a one-income household should hold about 12 months in the current environment of low job security, according to Dhawan.
Prepare for higher interest rates
Most home loans carry floating rates. When rates rise, the tenure increases first and then the EMI.
Interest rates may move by about 2-2.5 percentage points from the bottom to the peak of a cycle. “Homebuyers should have the buffer to handle a 1.5-2 percentage-point increase,” says Dhawan.
Prepayments can offset the effect of interest-rate increases and are particularly useful during the early part of the loan. Switching is prudent when the benefit of a lower rate exceeds the total transaction cost.
Run checks before buying
Obtain a pre-approved home loan before beginning the property search. The pre-approved loan reveals what a buyer can realistically afford. Knowing the approved loan amount allows the buyer to discard above-budget properties before they become attached to them.
A tenant should prefer a property that can be occupied quickly to avoid paying rent and an EMI simultaneously. Use bonuses, unexpectedly high salary increases or other inflows to prepay part of the loan when possible. “Increasing the EMI over time can also help repay the loan faster and manage affordability better,” says Dhawan.
