Never before, home loan customers have gone through such turbulent times like last 20 months when Repo rates were revised 13 times. This has confused home loan aspirants no end.
But if you are the one who is determined to go ahead with your plans to buy a house, then first and foremost thing you need to do is to check your eligibility. How much loan you are entitled for? Once you know the eligibility amount then the clear picture will be before you that how much down payment will be sufficient. Down payment is in the range of 15%-20%.
So what impact will change in rates, implying rise in rates will have on your eligibility?
Though your eligibility is determined by several factors like your occupation (whether you are salaried/ self-employed), your income, the interest rate charged by the bank and the tenure of the loan. Along the line you will discover, the interest rate on the loan not only influences how much EMI you will pay each month but also influences the loan amount you are eligible for. An interest rate fall can often make that dream home within reach. Also, as you increase your loan tenure, your eligibility increases as well – but there is a limit. Most banks would not do a loan for more than 20 year tenure and also it is imperative that you are not more than 58 years as on the date of last EMI payment. Also, the maximum loan to value ratio is typically maintained by most banks at about 80 % to 85% where the total value includes property value, stamp duty and registration.
Over and above, various banks have their own methods and standards for calculating eligibility. You should do some shopping to check which bank is offering you higher loan eligibility. Adding up your spouse’s income may also be a good option to increase your loan eligibility.
Now that everything is in place and you are ready to roll, Lo & Behold…another rate rise announced by various banks. Now what will happen to your eligibility? How much amount you will be eligible for now? The rise in rates lead to drop in eligibility amount, thus they are inversely proportional.
Let’s see how it all works:
Lenders assess certain portion of your income as available for payment of EMI of your loans. Though there are no standard norms as it varies from bank to bank. But lenders do take into account factors like expense and investment pattern, credit card dues, etc. But normally the lenders will assume that around 40%-45% of individual’s net salary is available for payment of EMI to serve all the loans. The figure can be higher if you are in a high-income bracket.
Now let us look at the illustration table to understand how the changes in interest affect one’s eligibility.
Mr. Sharma earns a monthly salary of Rs. 1,00,000/-. He wants to take a home loan for purchasing a property and has no other loans outstanding loan on his name at present. Assuming that he has satisfied all other criteria and the bank has considered 40% of his net income as available for payment of EMI, hence he will have Rs. 40,000 p.m. for payment of home loan EMI.
The current rate of interest of the bank is 10.5% p.a. for 20 years tenure. Hence, Mr. Sharma will be eligible for Rs. 40.08 lakh at an EMI of Rs. 998 per lakh.
Assume the bank has hiked the rate of interest by 0.5% p.a. to 11% resulting in a hike in EMI from Rs. 998 to Rs. 1032. With the increase in EMI, the eligibility of Mr. Sharma has gone down by Rs. 1.32 lakh.
Similarly if the rate of interest goes down by 0.5% i.e. from 10.5% to 10% pa, the EMI / Lakh reduces to Rs. 965/- which will make him entitle for an increase in eligibility by Rs. 1.37 lakh.
Always keep in mind that your dues on credit cards and repayment of other loans will also have a significant impact on your home loan eligibility. So if you are planning to buy property in the near future on loan and are sitting on eligibility fence, be sure to control all your unwanted expenses and keep your dues on credit cards and other loans to bare minimum.
Till then, happy home buying!
- Nikolai Kirtikar
Author works for ApnaPaisa which helps Indian consumers take informed decisions like: Which home loan is best for me? Do I need life insurance?