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Before buying a house, you should know the magical rule of 5-20-30-40 once. Actually, this formula will tell you how much home loan is right for your budget, so that you don't have to bear the burden of EMIs throughout your life.

Buying your dream home is the biggest dream of everyone's life, but this dream often gets buried under the burden of heavy EMIs of home loans. However, often people take a home loan more than their capacity in excitement and then keep paying that loan throughout their lives. So now don't panic. Actually, today we will explain to you such a 'magical formula' which is called the '5-20-30-40 rule'. This rule will tell you which house can be 'perfect' for your pocket.

1: '5 times' rule

This rule decides how expensive a house you should buy.

What is the rule:

You should never buy a house more expensive than 5 times your total annual income.

Example:

If the combined annual income of you and your life partner is only Rs 10 lakh, then you should not buy a house worth more than Rs 50 lakh (10 lakh x 5).

Why is it important:

This rule not only prevents you from taking a big loan but also ensures that you are prepared for other expenses in the future.

Rule 2: '20 percent' down payment

This rule sets the foundation of your home loan.

What is the rule:

You should always pay at least 20% of the total price of your house as down payment.

Example:

If you are buying a house worth Rs 50 lakh, then you should have at least Rs 10 lakh (20% of Rs 50 lakh) to pay from your pocket, i.e. this amount should be enough for the down payment. You can take a loan for the remaining Rs 40 lakh.

Why it is important:

The higher your down payment, the lower the loan amount will always be. This will make your EMI smaller and you will also save lakhs of rupees in interest to the bank.

Rule 3: '30 percent' EMI rule

This rule takes complete care of your monthly pocket.

What is the rule:

The EMI of your home loan should never be more than 30% of your monthly in-hand salary.

Example:

So if your monthly salary is only Rs 80,000, then your home loan EMI should never be more than Rs 24,000 (30% of 80,000).

Why is it important:

If the EMI is more than 30%, then your other expenses like household ration, children's fees, travelling and savings will be adversely affected and you will have to face shortage of money for other expenses.

Rule 4: 'Laxman Rekha' rule of '40 percent'!

This rule works to save you from getting completely trapped in the debt trap.

What is the rule:

The total EMI of all your loans (home loan, car loan, personal loan, credit card EMI etc.) should not be more than 40% of your monthly in-hand salary.

Example:

If your salary is around Rs 80,000, the total EMI of all your loans should not exceed Rs 32,000 (40% of 80,000)

Why it is important:

This rule is like a 'Laxman Rekha'

Let's understand the entire calculation with an example

Suppose your monthly in-hand salary is around ₹80,000.

Annual income:

₹80,000 x 12 = ₹9,60,000

'5 times' rule:

The maximum amount he can buy is ₹48 lakh (9.6 lakh x 5).

'20%' rule:

The down payment will be a minimum of ₹9.6 lakh (20% of 48 lakh).

Loan amount:

₹48 lakh - ₹9.6 lakh = ₹38.4 lakh.

'30%' rule:

Home loan EMI should not be more than ₹24,000 (30% of ₹80,000). (A loan of ₹38.4 lakh will be available for 20 years at approximately this EMI).

'40%' rule:

The total EMI (including other loans) should not be more than ₹32,000.

Although buying a house is an emotional decision for everyone, but everyone should take it after being completely practical. This rule of 5-20-30-40 is like a guide which ensures that your 'dream house' does not become a 'mountain of problems' for you, so now you can follow this rule on yourself once before buying a house (Note- The news is based on general information, you can plan to buy a house according to your budget etc.)

5 Best FAQs

Q1. What is the 5-20-30-40 rule?

This is a financial formula that tells how much EMI, down payment and loan is safe to take while buying a house.

Q2. Why is 20% down payment necessary while buying a house?

Making a 20% down payment reduces the EMI and the loan burden does not stretch for a long time.

Q3. What should be the EMI according to this rule?

The EMI should not be more than 30% of your monthly income, so that other expenses are not affected.

Q4. Does this rule apply to everyone?

Yes, whether you are a salaried person or a businessman, this rule is a safe guideline for everyone.

Q5. What happens if someone does not follow this rule?

Taking a large loan makes the EMI a burden, which increases financial stress and other investment opportunities are missed.

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