3 Cardinal Rules of Home Affordability

Mar 10, 2017

These rules are unique and more prevalent in western nations. Interestingly, they are referred to as the 28%, 32% and 42% Rules.

Some have even referred to these rules as the 3 Cardinal Rules of home Affordability.

Let's see what exactly these rules are and how they can benefit you:

28% Rule

This rule states that the monthly home loan EMI should not be more than 28% of your gross monthly income.

For example - If your monthly income is Rs 50,000, then your home loan EMI should be less than Rs 14,000. Similarly if your monthly income is Rs 2 lac, then ideally your home loan EMI should be less than Rs 56,000.

32% Rule

This is an extension of the 28% Rule. According to common definition of this rule, the total expenses that you bear for the house should not exceed 32% of your monthly income.

Now this 32% includes the home loan EMI (which as per earlier rule should be less than 28%), insurance, property taxes, maintenance expenditures, etc.

40% Rule

This rule states that the maximum monthly loan obligations for all forms of loans should be less than 40% of your gross monthly income.

Example - If your monthly income is Rs 2 lac and your home loan EMI is Rs 56,000 (as per the 28% rule), you have another 12% (= 40% - 28%) to be used for paying other EMIs (like car loan, personal loan, etc.).

Interestingly, this 40% rule is used in India by many lenders to process the loan applications.

Now you might be questioning as to whether these rules make sense or not. Fact is that 40% Rule is applicable in India already. As for the remaining ones, they help you stay on track of your personal finances by limiting what you borrow. So even though there is no watertight need that these percentages should be exactly like the ones mentioned, these rules still help.