Regardless of whether it is a small house or a large bungalow, most homebuyers apply for a home loan. To decide how much you should borrow and how much the lender can offer, you should understand your needs, your ability to repay the home loan, your income, your future potential income, your savings, equity to handle unexpected costs and many such important factors.
Banks and the financial institutions will not lend you the total cost of the property. Buying a home demands meticulous financial planning. Find out the right way to allocate your monthly income between investments, expenses, and loans.
Reliobrix tells you how to figure out how much you should borrow.
- Regardless of whether the property costs in lakhs or crores, if you buy property in India, most lenders will fund only up to 80 per cent of the market value of the property (90 per cent if the home loan is worth Rs. 30 Lakhs). Whether they fund 80 per cent of the market value will also depend on factors like your prior loan repayment credentials, income, credit score and similar factors. The funding will be lower if you are weaker on these parameters.
- The lender does not decide whether to lend to you looking at your gross income. The ‘net income’ or ‘pay in hand’ the benchmark they rely on to assess how much you will be able to pay towards the home loan monthly instalments.
- As we said, the lender funds 80-90 per cent of the market value of the property, depending on much you have taken as home loan amount. Where does the rest of the money come from? This comes from you. This owner’s contribution is called Margin money. Home loan borrowers are expected to contribute a certain percentage of funds, out of their own pocket, towards the home loan amount. Higher the margin money, lower will be the home loan amount and equated monthly instalments (EMIs).
- The best method/formula to estimate the home loan amount you should borrow is calculating the Debt-to-Income ratio (i.e. a measure that compares the borrower’s debt payments to overall income). Use home loan calculators to estimate how much you want and how much you can actually repay.
- Whether the property is under-construction or ready to move in also plays an important role in influencing the home loan amount. It is important to note that you will also have to pay service tax and value added tax (VAT) for under-construction apartments in India along with other hidden costs.
- Interest rates are another factor that helps you determine how much you should borrow as a loan. Look at the rate of interest in the long run. Longer the period over which your home loan is spread (i.e. tenure), more will be the interest paid. Be wary of the teaser rates that are offered just to attract customers, because you may end up paying more than what is usually offered in the market.
- Think long and hard if you are already paying rent. Paying EMI and renting together can cause a huge dent in your savings plan.