Home loans are money borrowed from financial/banking institutions on fixed or floating interest rates, to buy a house (or buy the plot or execute related renovation and construction activities). The consumer is liable to repay the loan in the form of EMIs as per the applicable interest rate and decided tenure. With phenomenal increase in property prices in India, the ownership of a house seems nearly impossible for an average Indian middle class family. Therefore, the concept of home loans and finance acts as a bridge between the average income of families and their desire of house ownership.
Rising inflation affects construction costs, rents and property prices. Therefore, capital appreciation is the major benefit associated with investing in a property. Other benefits include hassle-free documentation, reasonable interest rates, easy repayment options, home loan insurance options, complete legal evaluation of new home as well as other customizable and tailored solutions as per your requirements. Financial institutions such as Tata Capital assist housing loan applicants with a variety of tools for process guidance, calculate affordability, property search, document checklist and TDS filing.
Parameters Considered to Study Home Loan Affordability
Banks and financial institutions check the eligibility of home loan applicants and calculate the appropriate home loan amount that you can afford. The amount of housing loan that an applicant is eligible for depends on your occupational profile, annual income, savings (for down payment), investments, monthly debts, credit profile, loan-tenure, property tax, debt-to-income ratio (DTI) and applicable interest rates. Thus, complete finances of the loan applicant are assessed to get in-depth understanding his affordability.
Calculating Home Loan Affordability
- Step-1: To calculate the maximum housing expense on the basis of income
Most financial institutions follow the ‘baseline standard 28/36 rule’ as the home mortgage affordability rule. This rule implies that home loan applicants should not spend more than 28% of their pre-tax income for mortgage payment and total debt should not exceed 36% of pre-tax income. This step is the “28” part of the baseline rule and is calculated as under:
Maximum Housing Expense – 28% * Annual Income / 12
- Step-2: To find the DTI ratio
DTI Ratio = Total Monthly Debt Payments / Gross Monthly Income
Therefore, Maximum Monthly Housing Payment = DTI*Monthly Income – Monthly Debt Payments
- Step-3: Calculate the maximum mortgage payments as per expenses
These include principal amount, interest, insurance as well as the tax amount. The total amount of expenses in then subtracted from maximum monthly housing payment calculated before. The result would depict the maximum Principal-Interest (PI) payment as per expenses. It should also be noted that the interest rates for home loans are based upon Marginal Cost of Lending Rate (MCLR). All banks and financial institutions offer a competitive housing loan interest rate to attract applicants. The fixed interest rate is fixed, so as to pay equal EMIs throughout the repayment tenure. The floating interest rate fluctuates as per market conditions and the EMIs tend to change with time.
- Step-4: Calculate the maximum home loan price
Maximum Home Loan Price = (Available Amount-Fixed Costs) / (% Down + % Variable Cost)
Finally, all the above results are depicted in the form of a sharp graph, wherein the spreadsheet particularly highlights the limiting factors (which could be factors such as income, down payment, taxes, insurance and others).
Renowned financial institutions such as Tata Capital assist home loan applicants in calculating the maximum loan that they can afford and take a realistic decision to build their future homes. Such institutions strive to meet the housing finance needs of their clients via a step-by-step approach, helping them take confident decisions in home loan procedures. These institutions help the applicants to get their finances in order, so as to get a credit report. Thereafter, a budget planner calculator is used to understand how much can be borrowed. It is also important to keep a track on savings so that these could be used for many additional expenses. Finally, with better understanding of home loan affordability, the applicant may look out for an appropriate property that well fits the budget and takes care of intricacies of finances.