Home Loan, Rent or Insurance Premium - How Much Is Good?

Home Loan, rent or insurance premium are inseparable part of an Indian household’s expenses. Home loan EMIs dominate the expenses among all and can vastly impact the financial decisions of an individual. For example, servicing a home loan becomes taxing after few years when cost of living scales up, making it difficult to maintain prevailing lifestyles. Similarly, maintaining excessive numbers of traditional life insurance policies might still leave you underinsured and vulnerable at times of unfortunate eventualities. 

It is only wise to keep these expenses in control considering the influential roles they play in an individual's financial life. Evaluating these expenses as a percentage of your total income is one way to ascertain if you are within safe limits or went overboard. Here's is a recommended metrics to help you determine the ratio of these expenses to income. 

Home Loan EMI and House Rent

Going by the thumb-rule, home loan EMI or house rent expenses should not exceed 40% of your total income. That caps monthly outgo at Rs 40,000 for a person earning a monthly net salary of Rs 1,00,000. 

The Way Out

It is natural that salaried individuals are not familiar with this thumb-rule and might be paying home loan EMI as a higher percentage of their income than the recommended one. If this is the case then it's better to divert bonus or any surplus fund into prepaying the home loan at the earliest. Some may argue that investing the surplus amount in a high-yielding investment is better than prepaying home loan that helps in fetching tax benefits, but then it's also not prudent to retain a fixed expense in the times of exceptionally high career uncertainties. Moreover, it is best to repay a home loan if the house is self-occupied and is not an investment. Another better way of managing your home loan is to repay it after 5-7 years when you have reaped most of the tax benefits due to the higher outgo of interest during the starting years. 

At the same time, if the house rent is exceeding the said limit of 40% then you should consider shifting to a lower rent house or another locality. 

Insurance Premium

Fancy insurance policies have flooded the insurance market and leave the onus on the buyer of the policy to pick the right one for himself/herself. The recommended ratio of insurance premium to your total income is 6-8% and the insurance coverage should at least be ten times of your total annual income.

The Way Forward

It makes sense to buy an adequate term plan to meet this goal and invest the remaining surplus in a high yielding mutual fund rather than investing a huge sum into a ULIP or traditional plan. Ensure that the premium outgo is limited to the guided percentage while the high-cost policies such as whole-life plans or ULIPS are surrendered. 

Personal Loans 

The percentage of personal loans to your total income should not exceed 10% at any cost. Also, be cautious while taking a personal loan as it falls into the most expensive category of all loans.

Another Alternative

Borrowing from friends or relatives with interest attached could work well for short-term needs than taking a personal loan. Apart from these, an individual should maintain some form of emergency or contingency funds as a backup to effortlessly meet urgent financial demands. 

If any of your home Loan, rent or insurance premium payments are on the red side of the line then it's high time to bring them in order and employ remaining funds in a better-yielding fund. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

Visit www.facebook.com/Inverika to learn more.