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.
This article shows you an easy way to calculate how big a house you can buy based on your family’s combined monthly salary.
This article is a part of our detailed article series on the concept of home loans. Ensure you have read the other parts here:
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.
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 hike? You can prepay to keep EMI and tenor same. This post shows how.
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.
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.
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.
This article helps you decide when to prepay your home loan - at the beginning, middle or end of the total loan period.
This articles describes overdraft home loans like SBI Maxgain and BOB Home Loan Advantage.
This post discusses managing when interest rates go up increasing your home loan EMI.
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.
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:
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 reviewed 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.
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.
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.
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
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.
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
Here are some sensitivities of the LTV and maximum percentage of income to show the maximum house cost.
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.
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.
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.
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.
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:
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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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