The very reason to buy your dream home should not financially burden your lifestyle at all. Here's how to do it.
One of the biggest life goals of any individual or family is owning a house of their own. Everyone wants to buy a house in the best of location, with the best of amenities and surroundings on offer. It’s a status symbol, a financial security, and most importantly, a place you can call your own. However, the road to finding a perfect house always starts with the assessment to the most important question that you need to think of: How much home loan can you afford?
While the prevailing market conditions have improved from, how the year 2020 began, the income uncertainties still loom large for a large number of business owners and salaried workforce, who work in vulnerable sectors, the ones hit hard the most by the pandemic. While trying to know the answer to this not-so-simple question of how much money you should spend on buying a home right now, you need to factor in realistic expectations such as your existing and future income, the overall expenses you foresee on running a family, the EMIs you can afford, and the existing liabilities you have.
These factors will help you understand how much worth home you can afford, the home finance amount you should go for, and then search for properties within the precise price range.
Ideal EMI to your Income
Your yearly income is the key factor in determining if you are eligible for a loan and how much loan the bank will give you. As a guide by the lenders and financial institutions, the EMIs of your home loan cannot exceed 40-45 percent of your net salary. Based on the current interest rates and tenure, your expenses, and other factors the lender will calculate the EMI that would be required to pay off the home loan. For instance, let’s say you make Rs 12 lakh per year, you should think twice before taking out a home loan that is more than Rs 40-45 lakh. Now, in this case, your monthly take-home is a lump sum of Rs 1 lakh, so your monthly EMI cannot be more than Rs 45,000. However, if you have a partner who is also earning, you can comfortably increase the loan amount to Rs 90 lakh to Rs 1 crore. It increases the chances of buying a preferred house which can be larger and costlier.
After analysing your EMIs, banks also like to see if you have surplus income to take care of other expenses such as household expenses, medical allowance, house rent, other allowance, etc. This will help to assess the home loan amount you are eligible for.
Existing savings for downpayment
EMI is not the only factor affecting your home loan affordability. The down payment you make from your savings is an important factor in deciding the amount of home loan you can borrow. Most people usually end up paying a large amount of their savings to make this payment. The higher the down payment you make, the lower your interest rate is likely to be, as well the monthly EMIs. A down payment of 15-20% can be a healthy amount to start with. Using the above example – If your salary is Rs 1 lakh per month and you plan to take a 20-year loan, so, at the affordable EMI which is Rs 45,000, the loan amount you would get is Rs 60 lakh. As per the RBI rule, the bank will only lend 80% of the loan amount and the rest 20% down payment which is Rs 12 lakh have to be paid by you as a deposit.
Assess your existing & future liabilities
After analysing your income savings, it is also important to look at your current liabilities and future costs. Anticipating future expenses like medical bills, car payments or retirement planning helps in knowing the amount of loan you can afford. The accumulated expenses for the next 24-36 months, including the EMI amount you see paying on a monthly basis, will give you a clear indication of how much home loan payment you can afford.
Buy a property value that doesn’t financially burden your lifestyle
Combining the amount of money you are planning to borrow and the down payment you will make will tell the value of the property you can afford. When applying for a home loan, the borrower has to meet a certain set of conditions. These sets of criteria differ for every bank and non-bank financial institution and are used to determine the borrowers’ creditworthiness to repay the home loan on time without any default.
One of these criteria is the loan-to-value ratio. LTV is a financial term used to express the ratio of loan to the value of the asset purchased, the property in case of a home loan.
As specified by the RBI, the maximum amount that the banks can fund for a property is as follows – 90% LTV for loans up to Rs 30 lakh for buying affordable segment homes, 80% for loans between Rs 30 lakh and up to Rs 75 lakh and 75% LTV for loans above Rs 75 lakh.
To conclude, it’s always easier to go for a bigger home, and you can squeeze in money for downpayment etc with help from your family and friends. However, you must ensure that you have a right assessment on the long term liabilities, as well the lifestyle you wish to carry in the long run. Make sure to spend maximum time right in the beginning on this calculation. After all, you want to enjoy your life in the prime years. The very reason to buy your dream home should not financially burden your lifestyle at all.
(By Atul Monga, Co-founder & CEO, BASIC Home Loan)