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Can you afford to buy a house?

Whether you plan to buy a modest studio apartment or a four-bedroom penthouse, affordability depends on two things: the amount you pay as down payment and the size of the loan you can service.

     Print Edition: October 2009

Whether you plan to buy a modest studio apartment or a four-bedroom penthouse, affordability depends on two things: the amount you pay as down payment and the size of the loan you can service. Lenders also take into account the liabilities of the person before sanctioning a loan. While they consider other loan repayments, they also look at the income from other sources to assess how much money would be available to repay the loan. Use the worksheet on the left to see how big an EMI you can afford.

Gross Income vs Net Income
Lenders do not consider gross income while calculating your ability to repay the home loan. Your takehome pay after tax and other deductions is a better indicator of how much you can pay back. Also, a person with a steady income is preferred to one who has a higher, but irregular, income.

Willingness to Pay vs Ability to Pay
Lenders insist that debt repayments should not exceed 30% of the borrower’s net income. This ensures that the borrower is able to repay his loan comfortably. In the above example, the borrower is in the safe zone, with his EMI accounting for 30% of his take-home pay.

Rent + EMI = Zero Savings
In the above example, the person is paying rent as well as the home loan EMI, which means he is not able to save any money. Be ready for such a situation if you are buying a house in a project that is under construction. A delay in the project could upset your calculations.

Rising Interest Rates
When rates increase, lenders automatically extend loan tenures. If you have taken a long-term loan (20-25 years), then an extension is not possible. Your bank might ask for money upfront or increase the EMI. This can put you in a spot if you have stretched your repayment capacity to the fullest.

INCOME AND AFFORDABILITY
Your net monthly income determines how much loan you can take. Find out how big a loan you are eligible for and how costly a house you can afford at your income level. The calculations in the table below are based on the following assumptions:

  • 9.5%: rate of interest
  • 20 years: loan tenure
  • 80%: loan as % of cost
  • Nil: other income or loans

Safe, but underleveraged
EMI is 20% of net monthly income: Though the buyer is on safe ground, the low EMI outgo means he will settle for a smaller property that doesn’t cost too much or will make a bigger down payment.

The ideal equation
EMI is 30% of net monthly income: This allows the buyer to comfortably fulfill his other financial commitments. However, this will suit him as long as he is not paying rent along with the home loan EMI.

Touch and go
EMI is 40% of net monthly income: This person is skating on thin ice. A drop in income or rise in interest rates can send the household budget awry. Few lenders will sanction a loan where the EMI eats into such a large portion of the income.

  • In the West, the rule is to keep the housing loan EMI at 30-35% of the gross household income. In India, this ranges from 25% to 40%.
  • The ratio of EMI to net income goes up with the income level. In the higher income bracket, the EMI can be up to 35-40% of the net monthly income.

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