Home loan hurting your finances? Here's how you can recover from an overstretched EMI

For most Indians, buying a house is more than a financial decision - it is an emotional milestone. Yet many homebuyers stretch their EMIs to chase the dream of home ownership, often putting other financial goals at risk.

On LinkedIn, CA Vijay Kedia shared the story of a corporate professional who purchased a ₹2.5 crore luxury 3BHK apartment with a monthly EMI of ₹1.5 lakh. Within a few years, the financial strain began to show. The hefty repayment left little room to save for early retirement or his child's education, turning the dream into a financial burden.

Kedia argued that these two goals alone required about ₹2.5 lakh per month over the next 10 years, far beyond what the buyer could manage.

While some may dismiss the case as extreme, data suggests otherwise.

Reports show housing affordability in many Indian cities has worsened sharply. According to MagicBricks, the average household now spends 61% of its income on home loan EMIs, up from 46% in 2020.

Home loan EMI vs real cost of ownership

Experts say that equating a home loan EMI with the cost of the house may be a gross miscalculation. The real cost extends beyond this and includes stamp duty and registration, interiors and furnishing, monthly society maintenance, annual property taxes, home insurance and inevitable upkeep costs. In an ideal situation, the EMI towards home loans should not exceed 40% of a person's take-home salary.

"A home loan EMI should stay within 30-40% of the monthly take-home salary," said Anshi Shrivastava, Head - Personal Finance Training at 1 Finance. "A home loan runs 15 to 20 years. An income stretched too thin at the start stays stretched thin for two decades."

Sanjiv Bajaj, Joint Chairman & Managing Director, Bajaj Capital Ltd, says, "Salaries may grow, but so do children's education, healthcare, lifestyle and other financial responsibilities. The idea is to buy a home without putting the rest of your financial life on hold."

CA Geetanshu Bhalla of Geetanshu Bhalla & Associates said that a homebuyer must “act before the loan starts affecting your savings and lifestyle”.

Overshooting an EMI and reversing the mistake

If a person realises early in their journey that the situation is turning difficult to handle, it may still be salvageable. Experts said that if buyers' financial flexibility has begun to hurt, they must rework the overall equation as soon as possible.

Bajaj said, "Depending on the situation, this could mean extending the tenure, refinancing at a better rate, cutting discretionary debt or using surplus income for part-prepayment."

Shrivastava added, "Extending the tenure cuts the EMI right away. If the tenure increases, the total interest paid also rises, but that cost is far less than the cost of default."

Moreover, partial prepayment using a bonus, windfall, or any other maturing investment may permanently reduce the EMI or the tenure.

Bhalla, however, said that if the EMI remains unaffordable, selling the property may be the right financial decision.

Consolidation and reassessment

When a person buys a home using a mortgage, the bank technically owns most of it at first. But every month, as the EMIs go in, the buyers take a little bit of their house back from the bank. That portion of the home that they truly own free and clear is usually called home equity. If the property's market value increases over time, that extra value is also added to the buyer's side of the ledger.

Over the years, a buyer might have a massive amount of wealth locked up in that house. "Freeing it up" means turning that locked equity back into cash. This can be done either by selling the house outright or by keeping it and using it as collateral to borrow cash from a bank.

Experts said that this approach may work in several cases, such as funding a child's education, covering medical bills, or starting a business, as borrowing against a house offers much lower interest rates than personal loans or credit cards. But it requires utmost financial discipline.

"Selling or borrowing against the home can free up capital, but it should be done only when there is a clear and productive use for the money," said Bhalla, adding that it should not leave a person "house rich but cash poor".

Bajaj said, “Once you borrow against the property, you have converted part of your home equity into a liability.”

Shrivastava also cautioned, saying that interest rates on loans against property (LAP) are typically higher than those on standard home loans.

"Processing costs, valuation charges, and legal fees shrink the capital actually received. Total debt exposure jumps, landing on the same income already carrying the original home loan. A market downturn can wipe out the equity cushion a borrower was counting on, with no warning," she said.

Bottomline

For a decision as big as buying a house, the mantra may ultimately be that one evaluates one's financial position honestly, keeps in mind the long tenure, and - as one must do in most decisions - plays safe.

As Bhalla aptly said: “Owning a home should not come at the cost of financial stability.”