“DREAM, DREAM, DREAM. DREAMS TRANSFORM INTO THOUGHTS AND THOUGHTS RESULT IN ACTION”
- APJ ABDUL KALAM
We all have big dreams to achieve in our life. One of the dreams that all of us wish to accomplish is to have a house of our own. However, it is not possible for everyone to achieve it only through their income. Our constant urge to achieve it makes us think of availing home loans from banks.
However, with so many banks offering loans at attractive interest rates and the numerous free advices from our relatives, coworkers or friends can perplex our mind causing a decision paralysis.
If you are in this situation right now, then sit down, relax and read this article for it will guide you through the “Key Factors” you should follow before availing any kind of “Loan”, thereby, putting your mind at ease.
A. Check Your Eligibility:
Before deciding on owning a property, check if you are eligible to take a loan and if so, what is the maximum loan you can avail. Banks determine your Loan Eligibility based on:
a) Income i.e. Income Loan Eligibility: The maximum loan you can avail depends on the maximum EMI you can pay from your“monthly disposable income” which is fixed as a percentage by the bank:
1. Income less than equal to Rs. 15,000 – 40%
2. Income is between Rs. 15,000 to Rs. 50,000 – 50%
3. Income is greater than Rs. 50,000 – 60% - 85%
b) Property Value i.e. Property Loan Eligibility: Bank allows borrowers to avail loan up to 70% to 80% of the property value.
The maximum loan you are eligible for, will be the lower of the two.
However, from a financial advisor’s perspective, it is advisable to use only 35% of the “monthly disposable income” especially, for people falling under the bracket of Rs. 15,000 to Rs. 50,000. This will allow to set aside the remaining income to meet the emergency expenditures or invest it in any financial instrument for achieving other goals.
Criteria for Eligibility:
The bank checks the following to assess your eligibility:
1. Stability of income of the family
2. Repayment Capacity – Based on monthly income, expenses and other liabilities(if any).
3. Value of the assets in possession.
4. Credit Risk Score – You must have a good credit risk score for being eligible to avail loan.
c) Maximum Loan Eligibility: Assessing your maximum loan eligibility will help you to decide what kind of property you can afford at present. This can be explained with the following example:
Let’s assume the following:
1. Monthly Income is Rs. 60,000.
2. Age is 25 Years
3. Prevailing interest rate on home loan is 9%
4. Tenure of payment is 20 years
5. For a loan of Rs. 1 lakh, the “per lakh EMI” for a tenure of 20 years is Rs. 900 (approx.)
Based on these assumptions, you can now proceed with calculating the maximum loan eligibility:
From Banks Perspective:
Maximum EMI payable is Rs. (60% of 60,000) = Rs. 36,000
Now,
If your “Property Value” is currently Rs. 50 lakhs, then the maximum loan you can avail based on “Property Value” is 70% of Rs. 50 lakhs i.e. Rs. 35 lakhs. To calculate maximum loan eligibility based on income, the following formula is used:
[Maximum EMI Payable – Ongoing EMI] *1,00,000/ “Per Lakh EMI” i.e.
Rs[(36000 – 0) * 1,00,000/900] which is equal to Rs. 40,00,000.
Thus, bank will allow you to borrow up to Rs. 35 lakhs as “Loan” while the remaining Rs. 15 lakhs have to be paid as “Down Payment”
Note:You can visit different bank websites to know the maximum loan you can avail.
From Advisor’s Perspective:
1. Maximum EMI Payable is Rs. (35% of Rs. 60,000) = Rs. 21,000
2. Using the same formula, the maximum loan you should avail will be Rs. 23 lakhs.
3. Down Payment will be Rs. 27 lakhs.
If you do not have sufficient funds for Down Payment right now, a Rs. 50 lakhs house is currently not possible. In such situations, you can either own a less costly house or else, if you are determined to own a luxury one, you can opt for staying in a Rental Apartment till you earn or accumulate enough earnings to achieve your dream goal.
B. Charges Involved:
Apart from the interest charged by the bank, the total eligible loan amount offered to you contains other charges mainly:
1. Processing Fee: Banks charge 0.25% to 2% of the loan amount as processing fee. The fee can be higher depending on the maximum processing fee charged by different banks. This charge is completely negotiable.
2. Legal & Technical Due Diligence Charge: Sometimes the bank charges this separately along with the processing fee. This is also negotiable.
It is advisable to know these charges and negotiate them before you avail home loan from the
Availing loan is a lengthy procedure and you have to be patient at every step involved in this process. Having read this article, you can now effectively utilize your time by deciding all by yourself what kind of house you can buy based on your income and maximum home loan you are eligible to take. Take wise decisions while spending your income on important things like purchasing a house. If you take loan more than your affordability you will find difficulty to maintain a nice lifestyle.
