ET Realty explains how you can arrive at the budget for your new home to ensure the EMI is comfortable.
Determining how much you can afford to spend on a house is a crucial step in the process of buying a house. People start their search for a house only after arriving at an affordable budget. This is the first question that arises in the minds of prospective homebuyers.
Over-estimation can push you into a debt trap and financial crisis. Under-estimation can leave you with a house that is small and uncomfortable for your family needs. Should the borrower take a small home loan or can he afford a larger quantum of loan?
Here are a few pointers to help you arrive at the loan amount:
It is the general tendency to borrow more than the levels of financial comfort to own a luxurious house.People estimate their salaries will multiply manifolds in the coming years,making their monthly EMI repayments an insignificant part of their total expenditure.
Repayments become unmanageable in the event of disability of the earning member,temporary unemployment,inflation , economic slump, recession and peaking interest rates.However,you can afford to take a larger loan in case your working spouse also contributes to family expenditure.
Another aspect to consider is the ease at which you can find another job based on your work experience, qualification, expertise level and flexibility to relocate,in the event of losing the current one.
Tolerance & Eligibilit
Some homeowners prefer to be debt free as soon as possible.They lose their sleep if they are loaded with unpaid debts and financial commitments. Such homeowners have low tolerance to interest rate fluctuations and prefer the predictability of expensive fixed rate loans. People with low tolerance levels must opt for smaller loan amounts that can be cleared faster.It takes a longer time to repay a large loan amount.
A homebuyer's borrowing capacity is capped by the eligibility criteria of the lender.Banks gauge repayment capacity of a borrower based on his other outstanding dues like car loan or personal loan, income, age, qualification and other assets. The maximum EMI that will be permitted is around 30 to 50 percent of your gross salary.Apart from this,you are expected to pay around 20 percent of the cost of the property as down payment .
Debt-to-income ratio
Some experts opine that the risk of defaulting is higher with borrowers with a debt-to-income ratio of greater than 35 percent. Consider a borrower whose monthly takehome is around Rs 70,000. Of this,assume he needs to set aside Rs 10,000 towards a vehicle loan repayment and Rs 5,000 towards a personal loan repayment.
If his monthly EMI works out to be Rs 25,000, his net outflow towards serving all his debts amounts to Rs 40,000. The resultant debt-to-income ratio is 57 percent. To comfortably repay the loan, he must clear all the existing debts and reduce his debt-to-income ratio before applying for a fresh home loan.
Quantum of down payment
People who can afford to make larger down payments have the advantage of taking a larger loan.A bigger down payment lets you buy a more expensive home as you contribute more money to the loan amount sanctioned by the lender. It reaffirms the bank of your repayment capacity, as a major chunk of your money is locked in the project and you would dread to default.
Housing payment-to income ratio & Lifestyle adjustments
Generally, a housing payment-to-income ratio of 28 per cent is considered conservative.A ratio greater than 32 per cent is considered difficult to repay, especially for borrowers living on tight finances . Lower housing payment-to-income ratios are easier to manage.
Some borrowers are prepared to shift to a more frugal lifestyle in order to own a better house. Such borrowers who are prepared to cut down on wasteful expenditure can afford a larger loan amount. This could mean fewer vacations and lesser spending on entertainment.