Some thumb rules for house and car

Some thumb rules for house and car

1) In a fair market, the rental yields are close to cost of borrowing. If cost of borrowing is 10%, rental yield also need to be around 10%. Then only it makes sense to own a house.

2) Another thumb rule is that the value of the property should not be more than 3 times one's annual income. If your annual income is Rs.24 lakhs, your house purchase value should not be more than Rs.72 lakhs.

3) The house price to rent ratio should be around 15. If a house cost Rs.1 Crore and the annual rent is Rs.3 lakhs; the price to rent ratio works out to 33, which is very expensive. Going by the thumb rule, if this ratio is above 20, then the cost of owning is considered higher than cost of renting. This means you would be better of paying rent. In other words, the minimum rental yield should be 5% to justify owning a property.

4) Make it a point to save atleast 50% of the property value as down payment; till then live in a rented place. 10% down payment means you work rest of the life for welfare of the bank.

5) Home loan EMI as a part of your income (debt to income ratio) should not exceed 30% (i.e.) EMI should not exceed 30% of your take home pay.

6) The maximum you can pay for the car should not be more than 5% of your net worth. So if your net worth is Rs.2 crores, the car should not cost more than Rs.10 lakhs.

7) Makes more sense to buy a new car. But you should drive it for not less than 10 years.

8) 20/4/10 rule: If you decide to borrow for your car, you should at least put 20% down payment. The repayment tenure needs to be not more than 4 years. The monthly transportation cost should not be more than 10% of your take home salary. Transportation cost includes EMI, fuel and insurance.

9) The best rule: If you can save money and then buy a house and car by making full payment. No debt is the best option. Debt is slavery.