Most people looking to buy a house will agree that properties have remained overpriced for last several years.
But a slew of recent unexpected events seem to have happened in favor of home-buyers. Demonetization and RERA Act are slowly curbing the flow of black money in real estate. This will continue to have a downward pressure on property prices. Another reason for property buyers to rejoice is the lowering of borrowing rates.
So a stagnation (if not a fall) in property prices alongwith low home loan rates are making more and more people consider buying a house now than later.
But affordability of property is not only dependent on external factors but also on borrower’s financial profile. As buyers, most people are concerned with two things:
- Whether they will get the loan amount they need?
- Whether they will be able to easily pay the home loan EMIs in future?
Now lenders focus on both questions. The amount of loan that you can take depends first of all on the downpayment you make. Most lenders want borrowers to bring in 15-20% of the cost of the property as downpayment. So if you have Rs 10 lac for downpayment, you can expect to get a home loan of about Rs 40-45 lacs.
But there is more to it. Lenders would then want to assess your ability to repay the loan. There is an unwritten rule that lenders avoid lending more if borrower’s EMI-to-Income ratio exceeds 40%.
Lets take a simple example. Suppose you want to purchase a house of Rs 50 lac. You have Rs 10 lac saved up for downpayment.
Now the need of Rs 40 lac loan fits into the 15-20% downpayment criteria. But what about your ability to repay the loan?
A Rs 40-lac loan at 9% for 20 years has EMI of about Rs 36,000. If you do reverse calculation (using lenders’ 40% rule), then this EMI is 40% of Rs 90,000 monthly income. So if your monthly income is more than that, lender wouldn’t have much issue giving you the loan. On the other hand, if your income is lower (lets say Rs 60,000), then lender might ask you to lower your loan requirement – which might not be possible if you don’t have surplus money to increase your downpayment.
That’s how home affordability is evaluated by both borrowers and lenders.