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Home Loan Eligibility for Joint Applicants: how to buy a bigger house

This article shows you an easy way to calculate how big a house you can buy based on your family’s combined monthly salary.

Home Loan Eligibility for Joint Applicants: how to buy a bigger house


Posted on 17 Jan 2024
Author: Sayan Sircar
15 mins read
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This article shows you an easy way to calculate how big a house you can buy based on your family’s combined monthly salary.

Home Loan Eligibility for Joint Applicants: how to buy a bigger house

This article is a part of our detailed article series on the concept of home loans. Ensure you have read the other parts here:

📚 Topics covered:

How to calculate the budget of a house?

A house is generally funded by a mix of own funds and home loan. We have covered this topic in more detail here:

If the house has a loan component, then the maximum value of the house is capped by the amount of loan the bank will sanction. Before we get into the details, we will recap how a home loan works.

How a home loan works?

Mortgage payment vs home equity

The bank gives a home loan to own the property while you use it until you pay back the loan via EMIs. An Equated Monthly Instalment plan (EMI) is a standard way to pay off a loan by making a fixed payment monthly that has both interest and principal in the same amount.

EMI = Principal + Interest

In each EMI, the split of the interest and principal changes since the interest is based on the outstanding loan balance at that point and the rest of the EMI is principal. As the chart shows, the interest part drops off with time, and the rest is the principal. The actual numbers in the chart relate to a ₹50 lakhs home loan taken at 8% for 25 years. The EMI is ₹38,591. The down payment amount is ₹12.5 lakhs.

You can test the numbers using this calculator:

As you pay back the loan, your ownership share in the house will increase in the same way. At the point of taking the loan, you own 20% of the house (12.5 out of 62.5 of which 50 is the loan). The bank owns 80%. As the loan is repaid, you own more and more of the house as the principal is paid off. This is the concept of building equity in an asset. Equity is the part of the asset you own after subtracting the part that the bank owns.

Home equity value = Current home value - Outstanding loan balance

Once you build equity in your home, that has additional benefits:

  • you can take a top-up loan in case you need money for some other purpose like home improvement, or any other reason
  • the more you will get to keep if you sell the house

We break down the home loan rate into its major components to see where the fluctuations come from.

Repo linked Home loan rate = Repo Rate + Spread + Premium

Repo rate: This rate is decided by RBI. Home loan rates will move up and down as soon as RBI revises the Repo rate

The latest repo rate is 6.5%. This rate was last changed by RBI on 08 Feb 2024.

Spread: This is an additional rate on top of the repo rate that essentially captures the profit the bank can make off this loan relative to the deposits it offers to customers. This rate is generally revised every three years but will vary from bank to bank.

Premium: an extra value for some specific customers. E.g SBI adds another 15bps for non-salaried customers or will depend on the CIBIL score of the borrower. This value is also revised periodically like every three years.

Related:
This article explains how overall repo rate changes affect both borrowers and depositors.

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How much does a home loan cost?

A good thumb rule for calculating the EMI of a home loan is ₹1,000/lakh borrowed or ₹1 lakh/crore borrowed at 9% for 15 years. You can see more such examples here: How much EMI do I have to pay for my home loan?

Now that we know the EMI for the loan, we need to understand how much banks will lend for buying a house.

How much do banks lend for a home loan?

A bank will only lend a up to a percentage of the home’s market (registration) value. For example, if the registration value is ₹1 crore, typically a bank like SBI will lend ₹75 lakhs only. This percentage of loan amount to registration value is called loan to value (LTV)

Loan to Value = Loan amount / Registration value

LTV protects the bank in case the house price drops in the future.

In real life, the registration value might be lower than the home transaction value but the bank will calculate LTV only on the registration amount.

How much do banks lend as per a percentage of monthly income?

The main inputs that go into the decision making of the bank to find out how much to lend and at what rate depends on the

  • credit score (higher is better)
  • borrower’s age (younger is better)
  • type of job (salaried is better)
  • monthly income (higher is better)
  • other loan EMIs running (lower is better)

Basically, the bank wants a person who is young, having high salary, no loans already and a good repayment track record via credit score. Typically, banks will insist that the loan EMI is a low percentage of monthly family income say up to 30%. These requirements effectively cap the amount of loan that can be approved based on the above factors. Here the definition of monthly income may be gross (pre-tax) or net (post-tax) income depending on the bank. To understand how to manage a large home loan EMI:

Minimum monthly income = EMI / maximum percentage allowed

If we now calculate, using the ₹1 crore house example and ₹75 lakh loan, the EMI will be ₹75,000 and the monthly income, at least will be ₹75,000/.03 = ₹2.5 lakhs.

What is the maximum price of the house as per these criteria?

The price of the house is therefore given as:

Minimum monthly salary = Loan / 100 / Percentage

or Loan = Minimum monthly salary * 100 * Percentage

Therefore,

Cost of house = Loan / LTV = Minimum monthly salary * 100 * Percentage / LTV

Using the same examples,

100 = 75 / 75% = Minimum monthly salary * 100 * 0.3 / 75% = 40 * Monthly salary

So for 75% LTV and 30% maximum EMI/monthly income, the cost of the house will be 40 times the monthly salary

Sensitivities of LTV and maximum percentage of income

Here are some sensitivities of the LTV and maximum percentage of income to show the maximum house cost.

Down-payment from 15% to 20%

Maximum EMI% 15% 16% 17% 18% 19% 20%
27% 31.3x 31.7x 32.1x 32.5x 32.9x 33.3x
28% 32.5x 32.9x 33.3x 33.7x 34.1x 34.5x
29% 33.6x 34.0x 34.4x 34.9x 35.3x 35.7x
30% 34.8x 35.2x 35.6x 36.1x 36.5x 37.0x
31% 36.0x 36.4x 36.8x 37.3x 37.7x 38.2x
32% 37.1x 37.6x 38.0x 38.5x 39.0x 39.4x
33% 38.3x 38.7x 39.2x 39.7x 40.2x 40.7x

As the table shows, if you make a 20% down-payment and the bank allows a maximum 30% EMI as a percentage of the take-home pay, then the house you can purchase is worth at most 37x your monthly in-hand salary.

Down-payment from 21% to 25%

Maximum EMI% 21% 22% 23% 24% 25%
27% 33.7x 34.1x 34.6x 35.0x 35.5x
28% 34.9x 35.4x 35.9x 36.3x 36.8x
29% 36.2x 36.7x 37.1x 37.6x 38.1x
30% 37.4x 37.9x 38.4x 38.9x 39.4x
31% 38.7x 39.2x 39.7x 40.2x 40.8x
32% 39.9x 40.4x 41.0x 41.5x 42.1x
33% 41.2x 41.7x 42.3x 42.8x 43.4x

As the table shows, if you make a 25% down-payment and the bank allows a maximum 30% EMI as a percentage of the take-home pay, then the house you can purchase is worth at most 39.4x your monthly in-hand salary.

Down-payment from 26% to 30%

Maximum EMI% 26% 27% 28% 29% 30%
27% 36.0x 36.5x 37.0x 37.5x 38.0x
28% 37.3x 37.8x 38.3x 38.9x 39.4x
29% 38.6x 39.2x 39.7x 40.3x 40.8x
30% 40.0x 40.5x 41.1x 41.7x 42.3x
31% 41.3x 41.9x 42.4x 43.0x 43.7x
32% 42.6x 43.2x 43.8x 44.4x 45.1x
33% 44.0x 44.6x 45.2x 45.8x 46.5x

As the table shows, if you make a 30% down-payment and the bank allows a maximum 30% EMI as a percentage of the take-home pay, then the house you can purchase is worth at most 42.3x your monthly in-hand salary.

How does then a joint income help us to buy a bigger house?

If you have followed the content above, the crux is that for a home financed by home loan, higher the family income, the higher loan that can be sanctioned leading to a bigger house that can be purchased. For a couple with dual income, it makes a lot of sense to:

  • buy the house jointly
  • borrow home loan jointly

In such a case, multiple applied is on the couple’s combined monthly income. There are additional tax-related benefits as well which we will cover in a future article.

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This post titled Home Loan Eligibility for Joint Applicants: how to buy a bigger house first appeared on 17 Jan 2024 at https://arthgyaan.com


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