Home affordability: Consider peripheral localities, smaller house sizes

If going from a 2-BHK to a 3-BHK pushes the EMI beyond comfort, the bigger house becomes a risk rather than a solution

Preference for 3-BHK and larger homes is rising in India. Such homes now account for nearly 45–50 per cent of demand, up from 30 per cent in 2018, according to an Indian Chamber of Commerce (ICC)–ANAROCK report. At the same time, housing costs have climbed sharply: the average cost of a new 3-BHK across the top five metropolitan cities is now ₹2.7 crore, according to Square Yards. Buyers who feel priced out can improve their affordability by making a few disciplined choices on location, house size and loan structure.

Choose the right location

One way to lower the ticket size is to consider emerging peripheral locations and Tier-II cities. Prices are typically lower, and buyers remain part of the same urban ecosystem.

 

“You will benefit from the significant investments in physical infrastructure and connectivity being made in such localities,” says Ravi Shankar Singh, managing director, residential services, Colliers India.

 

Before buying, run a few checks. “Verify that infrastructure is actually progressing and not merely announced, especially metro lines, expressways and arterial road upgrades,” says Kanika Shori, founder and chief operating officer, Square Yards.

 

Assess how easily you can access employment hubs from the location. Areas with reasonable access to major job clusters tend to remain end-user driven and more liquid (easier to sell).  

 

Check social infrastructure — schools, healthcare facilities and daily retail — and look for early signs of rental demand.

Decide size based on affordability

Buyers often face a practical question: buy a smaller home now and upgrade later, or stretch for a larger one immediately. Homebuying is often an emotional decision, and many people overstretch on size without considering financial viability.

 

“Make the purchase decision based on your current affordability,” says Singh. A sensible strategy for first-time buyers is to purchase a 2-BHK in a good location and upgrade later as incomes and home equity grow. Real estate typically appreciates over time, and this gradual value growth can enable an upgrade to a bigger house in the future.

 

Shori suggests prioritising location quality and long-term EMI comfort over maximising bedroom count. “If moving from a 2-BHK to a 3-BHK pushes the EMI into uncomfortable territory, the larger house becomes a risk rather than a solution,” she says.

 

She suggests opting for a well-designed 2-BHK with strong carpet efficiency and flexible layouts that meet most functional needs. However, if a 3-BHK is available at the price of a 2-BHK by shifting to a peripheral location, buyers may consider that option.

Don’t overlook costs beyond EMI

Buyers often underestimate non-EMI costs that can materially change affordability. The biggest outflows typically include registration charges and stamp duty, which can add substantially to purchase costs.

“Renovation and fit-out expenses — ranging from basic interiors to structural changes — can escalate quickly depending on the house’s condition and the buyer’s preferences,” says Singh.

 

Other costs include goods and services tax (GST) on under-construction properties, brokerage and legal fees, interiors and furnishing, maintenance deposits, parking charges, property tax and insurance. Together, these can add a meaningful percentage to the total acquisition cost and should be planned upfront.

 

Also factor in maintenance costs: buildings with a large number of amenities tend to have high ongoing charges.

 

Affordability improves when buyers shift from an aspirational buying mindset to a functional buying mindset. “Value carpet efficiency, layout quality, and location over symbolic size or prestigious address,” says Shori.

Avoid EMI overstretch

Many buyers start by looking at the EMI they can afford and the down payment they can make, then back-calculate the house value. “A better approach to assess affordability is to put together all financial goals — children’s education, retirement and the house purchase — and then decide the EMI you can afford while still contributing towards other goals,” says Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisors.

 

Banks may be willing to lend the highest possible amount. Buyers, however, should restrict all EMIs put together to not more than 40 per cent of one person’s net income at the time of decision-making. Aim for a 20–30 per cent down payment.

 

Calculate non-discretionary expenses carefully to arrive at what you can set aside realistically for the EMI. “While heuristics like EMI-to-take-home are a starting point, buyers should do deeper analysis to decide what they can really afford,” says Deepesh Raghaw, a Sebi-registered investment advisor.

 

Next, calculate the EMI at prevailing rates for a tenure that typically ranges from 15 to 30 years, based on comfort level and how much time is left for retirement. “Keep an income buffer because EMIs can rise if interest rates go up,” says Raghaw.

 

The type of property you purchase will also have a bearing on the EMI you can afford. If you opt for an under-construction property, you may still pay rent, which can rise. Delays can exacerbate financial stress.

Tenure: Interest cost versus EMI affordability

In India, you can choose a tenure ranging from 15 to 30 years. A longer tenure reduces the EMI burden but increases total interest cost over the tenure of the loan. So, ideally, you should try to keep the tenure as short as possible.

 

If you take a slightly longer tenure, try to prepay to the extent possible. “When you prepay, keep the EMI constant and reduce the tenure, not the other way around,” says Dhawan.

 

Try to ensure the home loan is paid off at least five to 10 years before retirement, so that this burden is taken care of before your income plummets.

 

When in doubt about your ability to pay a particular EMI, however, opting for a longer tenure can offer flexibility. “You can always prepay later and reduce your tenure. But if you opt for a shorter tenure, it is typically difficult to increase it later,” says Raghaw.

Co-borrowing: Useful, but don’t depend on it

Co-borrowing and purchasing with a spouse can save on stamp duty, which can be significant on expensive homes. It can also increase loan eligibility. The risk is that one spouse may have to quit work for maternity-related issues, child-care, or to look after elderly family members. Even if the break is short-term, returning to work can become difficult after a few years because skills tend to get outdated.

 

“The loan amount should be decided taking into account one income, not two, and total EMIs should remain within 40 per cent of one person’s net income,” says Dhawan. Buyers should also maintain an emergency fund so that if job loss occurs, the other partner is not unduly stressed.

Precautions: Emergency fund and term cover

Before taking on a large burden such as a home loan, build an adequate emergency fund. The size should match the nature and stability of your job or income. If you work in a startup sector, an emergency fund of 12–15 months of expenses can be appropriate. If self-employed, it should equal 18–24 months of expenses.

 

As for the amount of term cover you need, treat it as a simple equation: life cover plus existing assets should be sufficient to cover all liabilities and provide for family goals. “Term cover should clearly cover the full home loan amount, other loans such as business or car loans, and goals such as children’s education, marriage and regular living expenses,” says Dhawan.

 

Avoid mistakes that can cause long-term financial stress

 

• Don’t base affordability calculations on optimistic assumption of income growth
• If you assume growth, keep it conservative; at best, inflation-linked (around 6 per cent)
• Avoid overspending on interiors/fit-outs if it compromises other goals
• If buying under-construction house because it is cheaper than a ready-to-move-in house, factor in risk of delay or non-completion
• Your EMI should not be so high that there is no buffer in case the EMI rises due to a sharp rise in interest rates