Banks answer one question: will this person probably repay? You have to answer a harder one: will I still be okay in year eight, after a job change, a baby and two rate hikes? A home loan is likely the biggest commitment you will ever make, and most of the regret around it comes from borrowing the maximum on offer.
Start with the EMI, not the price
Work backwards from what you can pay each month. A common guideline is to keep all your EMIs together under 35 to 40 per cent of your take-home pay. Lenders are often willing to go to 50 per cent or more, measured as FOIR (Fixed Obligation to Income Ratio). That is their risk limit, not a comfort limit.
A quick test: add up your current monthly spending on essentials and your insurance premiums. Subtract that, and the investments you refuse to stop, from your take-home pay. What is left is the most your EMI can safely be.
How the EMI is built
The formula is EMI = P × r × (1+r)n ÷ ((1+r)n − 1), where P is the loan, r is the monthly interest rate and n is the number of monthly instalments. You don't need to calculate it by hand. Our EMI calculator does it and shows the year-by-year split. What you do need to understand is how much the tenure changes:
| Tenure | Monthly EMI | Total interest | Total paid |
|---|---|---|---|
| 15 years | ₹50,713 | ₹41.3 lakh | ₹91.3 lakh |
| 20 years | ₹44,986 | ₹58.0 lakh | ₹108.0 lakh |
| 25 years | ₹41,960 | ₹75.9 lakh | ₹125.9 lakh |
| 30 years | ₹40,231 | ₹94.8 lakh | ₹144.8 lakh |
Going from 20 to 30 years cuts the EMI by only about ₹4,750 a month but adds almost ₹37 lakh in interest. A longer tenure is useful as a cushion, but treat it as a safety net you plan to leave, not a place to live.
The size of the price tag
A usual ceiling is a property price of three to five times your annual household income. At the higher end, it only works if you have a stable income, few other debts and a big down payment.
Most lenders finance 75 to 90 per cent of the value, so you need to bring the rest. And that's not the whole bill. Add stamp duty and registration (which vary by state), brokerage if any, GST on under-construction homes, loan processing fees, moving, and the interiors people never budget for. Setting aside several per cent of the price on top of the down payment is realistic.
Don't empty your savings into the down payment. Keep six months of expenses, including the new EMI, in a liquid place. The first year after buying is exactly when surprise costs show up.
Fixed or floating?
Most home loans are on floating rates linked to an external benchmark, usually the RBI repo rate. When the benchmark falls your rate should fall with it, and when it rises, so does your EMI or tenure. Check how your lender passes changes on and how often the rate resets. Before you accept a loan, ask what the rate would do to your EMI if it went up two percentage points. If that number scares you, borrow less.
Prepay the loan or invest the surplus?
This is the argument every homeowner has with themselves. Both choices are reasonable, and the honest answer is that it depends on how you feel about certainty.
Prepaying gives a guaranteed return equal to your loan rate. Every rupee you prepay stops costing 9% (or whatever your rate is) from that day. It works best early in the loan, because early EMIs are mostly interest.
Investing may earn more over long periods, but not in a straight line and not for certain. Equity can fall for years.
Paying one extra EMI each year closes the loan in about 16 years and 7 months and saves roughly ₹11.6 lakh in interest. Adding ₹5,000 to every EMI closes it in about 15 years and 6 months and saves roughly ₹15.2 lakh. A ₹5 lakh lump sum in month 24 saves about ₹16 lakh and cuts the term by nearly four years.
A middle path many people like: keep your tenure, direct windfalls (bonus, tax refund) to the loan, and keep your SIPs running. For floating-rate loans taken by individuals, RBI rules do not allow lenders to charge a prepayment penalty, but confirm the terms in your own agreement.
Tax benefits, briefly
If you are in the old tax regime, the principal part of your EMI can qualify under Section 80C and interest on a self-occupied home under Section 24(b), within limits. The new regime generally doesn't allow these deductions. Check which regime suits you before you let tax savings push you into a bigger loan. A deduction is never a reason to borrow.
Before you sign
- Check your credit report and fix errors first.
- Get sanction letters from two or three lenders and compare the total cost, not just the rate.
- Ask about processing fees, charges for switching to a new rate, and insurance bundled into the loan.
- Buy a term plan sized to cover the outstanding loan, so your family never has to sell the home to clear it.
Tax rules, RBI directions and lender policies change. Confirm current limits and charges with your lender and a tax professional.
This article is for general education and is not personal advice. Found a mistake or an out-of-date number? Tell us and we will check it.