Most home buyers in India apply for a loan. Home loans are repayable in monthly instalments, which makes it easy to afford, and therefore, all the more attractive when you are trying to own property or an immovable asset. To this end, how much you should borrow as a loan requires a composite understanding of your needs, your ability, your income and your future income potential. Your capacity to handle unexpected costs on the way is also a very important thing to keep in mind.
With all this in place, here are a few important points to help determine how much loan you can borrow comfortably.
a) If you want to buy property in India, a bank or financial institution would loan you up to 80% of the total costs involved in buying a home. However, this is not always so – it depends on your income statements, your credit score and your outstanding dues if any. Prior loan repayment credentials also go a long way in determining how much a bank would be willing to loan to you.
b) Banks tend to expect that borrowers should at least make 20% of the total payment towards their house purchase. If you make a higher down payment, your loan amount and the EMIs to be paid will be much lower. Home loan interest rates are often compounded. The longer the tenure period, higher would be the interest payment. Therefore, at the same rate, one can buy a far more expensive home and pay a lower EMI if the down payment is higher
c) Your gross income is not the benchmark, but the net income or “salary in hand” would perhaps be an appropriate guide for you to see how much you can afford to pay every month.
d) Lifestyle is also a factor that one cannot ignore while deciding on the amount that can be allocated towards repayment of a home loan repayment. Higher expenditures on a monthly basis would mean that you might find it difficult to repay a higher monthly EMI, while the converse is as true.
e) Interest rates are another factor to help you determine how much you should borrow as a loan. Look at the rates of interest in the long run. Rates that are likely to rise in the future cannot be easy to afford. But, if the interest rates are likely to fall, one can afford to pay off a greater amount, over a longer period of time.
f) If the property is under construction, one should estimate how comfortably they can live after paying the EMI and rent. It is important to note that you will also have to pay service tax and VAT for under-construction apartments in India along with other hidden costs.
g) The best indicator for how much your home loan should be is your debt-to-income ratio, which refers to the fraction of your monthly income that you devote toward repaying the debt. A debt-to-income ratio should ideally be lower than 30%. If your household income is rather high, you can still afford to pay more.
Applying for a loan requires some effort and thoughtful calculation. In taking a loan, prudence is one of the most important factors, particularly where as a borrower, your ability to afford the loan takes precedence. With these simple guidelines, it might be a lot easier to factor in a pragmatic loan acquisition decision.
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