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

Posted on 17 Jan 2024
Author: Sayan Sircar

Tags: House Purchase ; Loans

18 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:

How can you pay the least interest and get the most tax deduction on your home loan?

This article breaks down the benefits of prepaying your home loan and how it impacts both your interest payments and tax savings.

How much time and interest do you save if you pay off your home loan using a step-up EMI?

This article shows how quickly you can pay off your home loan, and even save a lot of interest, by increasing your EMI steadily year-on-year.

Home loan tax benefits that you get when you buy a property jointly with your spouse

This article tells you why it is a good idea to buy a home jointly as a couple and it is not only the tax benefits you get.

Home Loan Rate Hiked? How Much Prepayment should you make to Keep EMI and Tenor Same?

Home loan rate hike? You can prepay to keep EMI and tenor same. This post shows how.

How paying a small fee to your bank can save you lakhs in home-loan interest?

This article shows how paying a small fee to your bank to reduce your home loan rate can save you lakhs in interest over the life of your loan.

What benefit do you get if you make a one-time prepayment to your home loan?

This article shows you the benefits due to interest saving when you make a part-payment to your home loan. Your loan duration also reduces due to the pre-payment.

How much EMI do I have to pay for my home loan?

This article shows a handy ready reckoner for home loan EMI amounts for all tenures and interest rates along with the amount of principal and interest to be paid.

Should you prepay your home loan at the beginning or at the end of the tenure?

This article helps you decide when to prepay your home loan - at the beginning, middle or end of the total loan period.

How does an overdraft loan like SBI Maxgain work?

This articles describes overdraft home loans like SBI Maxgain and BOB Home Loan Advantage.

What should you do when your home loan interest rates go up?

This post discusses managing when interest rates go up increasing your home loan EMI.

📚 Topics covered:

How to calculate the budget of a house?
How a home loan works?
How much does a home loan cost?
How much do banks lend for a home loan?
How much do banks lend as per a percentage of monthly income?
What is the maximum price of the house as per these criteria?
Sensitivities of LTV and maximum percentage of income
How does then a joint income help us to buy a bigger house?

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:

how to know if you can afford the house vs. your other goals: Goal-based investing: how to purchase your dream home
how to fund the house purchase: Should you sell your mutual funds to buy a house?

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 includes 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 the RBI. Home loan rates will move up and down as soon as the RBI revises the repo rate.

The latest repo rate is 6.5%. This rate was last reviewed by the 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. For example, SBI adds another 15 bps for non-salaried customers or it will depend on the CIBIL score of the borrower. This value is also revised periodically, like every three years.

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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.

Also read
What is CoastFIRE? How to achieve CoastFIRE in India?

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.

Down-payment more than 30%

Maximum EMI%	25%	26%	27%	28%	29%	30%	31%	32%	33%	34%	35%
35%	46x	47x	47x	48x	49x	49x	50x	51x	52x	52x	53x
40%	53x	53x	54x	55x	56x	56x	57x	58x	59x	60x	61x
45%	59x	60x	61x	62x	62x	63x	64x	65x	66x	67x	68x
50%	66x	67x	68x	68x	69x	70x	71x	72x	74x	75x	76x
55%	72x	73x	74x	75x	76x	77x	79x	80x	81x	82x	83x
60%	79x	80x	81x	82x	83x	85x	86x	87x	88x	90x	91x
65%	85x	87x	88x	89x	90x	92x	93x	94x	96x	97x	99x
70%	92x	93x	95x	96x	97x	99x	100x	101x	103x	105x	106x
75%	99x	100x	101x	103x	104x	106x	107x	109x	110x	112x	114x
80%	105x	107x	108x	110x	111x	113x	114x	116x	118x	120x	121x

As the table shows, if you make a 50% 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 70.4x 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, the multiple applied is on the couple’s combined monthly income. There are additional tax-related benefits as well which we have covered here: Home loan tax benefits that you get when you buy a property jointly with your spouse

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