How Much Home Loan Should You Apply For?

Most home buyers in India apply for a loan. Apart from allowing you to make the payment in equated monthly installments (EMIs), home loans allow you to make the payment toward owning an asset. This is not true of renting. In the long run, renting is far more expensive.  But, as a home buyer, you probably do not know how much of the cost your home loan should ideally cover.

There are no hard and fast rules. But, how much your home loan should cover depends on your needs, requirements, income and future income potential. You should also be able to handle the unexpected costs along the way. What factors do individuals and banks consider while deciding how much mortgage loans should cover? Here are a few broad guidelines:

1. If you wish to buy property in India, banks and financial institutions would lend about 80% of the total costs of buying a home. But, this is not always the case. Banks and financial institutions often review your income statements, credit score, outstanding liabilities and other similar factors before deciding on the amount they wish to lend to you. If you had earlier taken an educational loan or a car loan that you are yet to fully repay, lenders would see them as outstanding liabilities.
2. Banks often insist that borrowers should at least make 20% of the total payment towards their home. Moreover, if you make a higher down payment, your EMIs will be lower. As home loan interest rates are often compounded, the longer your tenure period, higher would be the interest payment. This means that at the same cost, you can buy a far more expensive home and pay a lower EMI if the down payment is higher. But, this need not mean that as a home buyer, you should necessarily do so. For many home buyers, it is more convenient to have a longer loan tenure period.
3. A common mistake home buyers make while estimating how much their home loan should cover is that they consider their gross income as a benchmark. But, your “net income”, or “salary in hand” would perhaps tell you how much you can afford to pay every month.
4. Your lifestyle is a factor you cannot ignore while deciding on the amount you can allocate towards home loan repayment. If you frequently dine at restaurants, or if your children go to expensive schools, you would find it difficult to make a significant monthly payment even if your salary is much higher than the EMI. If your job is not secure, you must take this into account too. If you do not make the EMI payment on time, the penalty is fairly high.
5. Interest rates are another factor. If the interest rates are likely to rise in future, you cannot afford to spread the payment over a long loan tenure. But, if the interest rates are likely to fall, you can afford to pay off a greater amount, over a longer period. Female home buyers can apply for a greater amount as home loan, because interest rates are lower for women.
6. If the project in which you buy a flat is under construction, you should estimate how comfortably you can live after paying the EMI and rent. You will also have to pay service tax and VAT for under-construction apartments in India.
7. Perhaps the best indicator that tells you how much your home loan should cover is your debt-to-income ratio. Debt-to-income ratio is the fraction of your monthly income you devote toward repaying debt. In India, households often pay 25-40% of their income as EMIs. But, debt-to-income ratio should ideally be lower than 30%. If your household income is exceptionally high, you can afford to pay more.