Mortgage rates continue to trend at their lowest in 15 years, thereby leading to reduced EMIs for homebuyers, reflecting into a significant bearing on affordability.
Going by the reports of some leading real estate consultants in the country, sales of real estate residential properties are on the rise. According to JLL’s residential market update – Q3 2021, the residential sales over January and September 2021 have increased by 47%, compared to the same period last year across the top seven cities. The home loan interest rate is at multi-year low and for most leading banks, the home loan interest rate starts at around 6.5 per cent.
One key reason for the sales to pick up could be the affordability factor. JLL recently announced the launch of its annual Home Purchase Affordability Index (JLL HPAI 2021) which shows that between 2013 and 2021, affordability has increased consistently across key Indian cities which were part of the Index.
According to the JLL HPAI 2021 index, Mumbai, India’s most expensive property market has witnessed a significant rise in home affordability index, breaching the affordability threshold of 100 this year. In 2020, Kolkata overtook Hyderabad to become the best market in terms of home purchase affordability.
During the current year, household incomes witnessed a sharp increase of 7%-9% (from the low base of 2020) in the markets under consideration, the report stated. At the same time, home prices remained stagnant in all of India’s prime residential markets except for Hyderabad.
Moreover, mortgage rates continue to trend at their lowest in 15 years, thereby leading to reduced EMIs for homebuyers, reflecting into a significant bearing on affordability.
What is Home Purchase Affordability Index (HPAI)
As per the report, Home Purchase Affordability Index (HPAI) is the ratio of the average household income to the eligible household income. The eligible household income is defined as the minimum income that a household should earn in order to qualify for a home loan on a 1,000 sq ft apartment at the prevailing market price.
Interpretation: A value of 100 means that a household has exactly enough income to qualify for the loan, while a value less than 100 implies that an average household does not have enough income to qualify for a housing loan. A value of more than 100 implies that an average household has more than enough income to qualify for the home loan.
Affordability and Home Loan
When you are buying a home on home loan, the Home Purchase Affordability is an important parameter that you need to keep an eye on. The cost of a home that one buys and is affordable within the budget is typically a function of one’s income. As a thumb rule, the price of home should be 5 times of one’s take home annual pay. For example, if the net annual income is Rs 15 lakh, the cost of the house should be Rs 75 lakh. In such a case, servicing a home loan through EMI is easier for the buyer and owning a home is without stretching one’s household budget.
While taking a home loan, the lender will ask you about your existing liabilities including personal loan or car loan EMIs. Banks generally do not lend an amount on which the EMI will be more than 45-50 per cent of your monthly take-home pay.
It’s better to take a loan where the home loan EMI is not more than 35 per cent of your monthly income while total EMI including car loan etc should be restricted to 50 per cent. If there is no other loan, you may go up to 50 per cent with a home loan. This will give you the opportunity to save for long term goals as well. You can add spouse income to enhance home loan eligibility as well.
Some of the key factors in calculating home loan affordability or eligibility are your monthly income, cash reserves to cover your down payment, your monthly expenses and your credit profile. The home affordability calculator will provide you with an appropriate price range based on your situation. Most importantly, it takes into account all of your monthly obligations to determine if a home is comfortably within financial reach.
What does Home Purchase Affordability Index signify
JLL Home Purchase Affordability Index (HPAI) signifies whether a household earning an average annual income (at an overall city level) is eligible for a housing loan on a property in the city, at the prevailing market price. The index has been derived through a combination of variables which include home loan interest rates, average household income and price of the residential apartment.
The interplay between property price, income and home loan interest rates influences the ability of a household to afford a home purchase. The cost of the property is further determined by the per sq ft price prevailing in the city and the average area of the apartment. It is pertinent to note that a reduction in house size may bring in affordability, without decrease in per sq ft pricing. However, this reduction in the size of the apartment may be a compromise on the buyer’s side.
According to the report, the current year is expected to witness Hyderabad surpass the 200-mark on the affordability index followed closely by Pune. The index indicates that an average income earning household in the markets of Hyderabad and Kolkata has enough income to qualify for a home loan on two 1,000 sq. ft apartments (or one 2,000 sq. ft apartment) at the prevailing market price.