Affordability Check is the most critical step before you start house hunting.

An “Own House” is such a key criteria in determining if you are “successful and settled”. Most young people go for building assets by buying their own flat /apartment to live in.

A car, of late, has become a necessity and most invest in a car almost as soon as they start work. But buying a home to live in comes after a life partner joins your life.

Take the case of Akash (28) and Megha (27), who are a young couple with a household income of Rs.60,000 per month. They have availed a car loan and pay an EMI of Rs.8000 pm.

Their monthly household expense is Rs.20,000. They have a spare income of  about Rs.30000/- every month which they can easily pay as their EMI for repaying a housing loan,  as they currently live in a rented flat and want to buy a house of their own. The properties which they liked were in the range of Rs. 35 lac to 40 lac.

They finalised on a flat for Rs.35 lac with a plan to avail a housing loan for Rs.30 lac and jointly applied for a loan. After going through the tedious process of getting their papers in order and applying at multiple banks, they ended up dejected as the house they liked for 35 lacs was not affordable to them.

All their efforts made over 3 months were in vain. They realised from their home loan applying experience that it is not always about what you like, but about what you can afford. Now they will have to start all over again and find a home which they like and yet falls within the loan amount sanctioned by the banks.

But affordability is not as simple as checking your monthly EMI paying capability. When you check your affordability, you have to keep in mind the money required to maintain  your living standard. In an inflationary economy,  make future goals and also make a provision for exigencies.

Let’s understand this with the case of Akash and Megha. Suppose a bank sanctions them a loan of Rs.30 lac for 20 years at 10.5% interest rate. Their monthly EMI would be a little over Rs.30000. Now after paying their monthly EMIs and household expenses they would be left with Rs.2000 of spare cash, which is less than 3% of their combined income.

With Rs.2000 to spare every month, they can’t buy furniture for their new house, can’t spend on clothes, entertainment and most importantly can’t make any other savings.

They would have their own house to live in but they would have to struggle to maintain a good lifestyle. They would be “House Poor”. As their income level stands, they would be left without any liquidity for future and any exigencies that would require money of a sizeable amount.

Suppose it is guaranteed that both are definite to get about 10 – 15% raise in their salaries with the new financial year after their appraisals, then perhaps they could get into this venture since it would only be a matter of a few months when they would have to tighten their belts.

But if there are no guarantees of any amount of increment and the income is likely to remain the same or increase nominally, then they need help to know the amount they can afford to spare to buy a house so that the purchase doesn’t curtail and cramp their life and lifestyle and become “House Poor”.