According to the Periodic Labour Force Survey (PLFS) Annual Report 2022-2023, about 5 per cent of the Indian population falls within the income bracket exceeding Rs. 8 lakh per year. With a rise in disposable income, the average man looks to upgrade his lifestyle. And almost everyone will agree that owning a house is the ultimate big Indian dream. But with prices soaring, buying a house with cash upfront can be tough. With home loans becoming increasingly accessible, let us find out what should be your appetite be for financing your dream home through a bank.
Assess your financial health
Before you start applying for a home loan, you should take a clear look at your finances and monthly expenses. Use online home loan calculators to estimate the loan amount you might be eligible for based on your income and expenses.
When you are looking to finance your dream home, it is important to know how much funding you can get from the bank. Typically, banks offer loans ranging from 75 per cent to 90 per cent of the property's value, depending on factors like your income and creditworthiness.
It is a common misconception that a bank will give you a home loan based on your salary. Although a salary slip is an important document, banks generally want to check your repayment capacity. If you are someone with more than one income source, you should keep your Income Tax Return (ITR) updated.
Another important factor is the credit score. A good credit score is crucial for loan approval. Obtain your credit report and ensure it is error-free. Pay off any outstanding debts and try to maintain a good credit history.
How to set a realistic budget
Establishing a realistic budget is crucial to avoid overstretching your finances. Different lenders have varying criteria for loan eligibility. As a general rule of thumb, your monthly EMI (Equated Monthly Installment) should not exceed 40-50 per cent of your monthly income. Lenders assess your ability to repay the loan based on factors such as your income, credit history, and existing debts.
Decide on a loan tenure that aligns with your financial goals. While a longer tenure may reduce monthly EMIs, it can increase the overall interest payout. Interest rates can significantly impact the overall cost of your loan. Shop around and compare interest rates offered by different lenders. Consider fixed and floating interest rate options, understanding the pros and cons of each. A lower interest rate can lead to substantial savings over the lifetime of the loan.
To increase the chances of easy loan approval, aim for a loan amount aligning with your income and expenses. Banks may increase the loan amount by incorporating interior costs, providing additional funds for short-term needs with the option to prepay.
Some banks also provide a special type of loan called Max Gain, which combines a home loan with an overdraft (OD) account. A home loan overdraft is a feature that allows borrowers to treat their loan account like a running account. Instead of fixed EMIs, they are given an overdraft limit, and they can deposit or withdraw funds as needed. Interest is calculated only on the outstanding balance, providing flexibility. Surplus funds can be used for any purpose, and there are usually no prepayment charges. This feature suits those with irregular income or varying financial needs. Terms and conditions vary among financial institutions, so borrowers should review them carefully.
Down payment and other costs
Plan for the down payment, which is usually 20 per cent of the property cost. Paying more than that can lower your loan amount and interest substantially. Ensure you have an emergency fund in place to cover unexpected expenses or financial downturns. This will prevent you from dipping into your home-related budget.
Beyond the purchase price and down payment, there are additional costs associated with buying a home. These include registration fees, stamp duty, maintenance charges, and home insurance. Factor in these expenses when calculating your budget to avoid any financial surprises.
Be aware of the differences between floating and fixed interest rates and how banks adjust loan rates with changes in base rates. Floating-rate loans offer flexibility, with interest rates varying based on market conditions. Fixed-rate loans provide stability, but prepayment penalties may apply.
Consider any potential changes in your income or lifestyle. Anticipate future expenses such as education, healthcare, or family expansion. There could also be unanticipated expenses. However, there is some respite too as salaries will also increase over time. Consider the loan overdraft facility if you have no additional EMIs running at the moment.
Individuals should carefully assess their specific financial situations, considering factors such as existing debts, monthly expenses, and future financial goals, to determine the most suitable loan amount. Consulting with financial advisors on PropTech platforms can provide personalised recommendations based on individual circumstances.
Explore government schemes
Governments often introduce housing schemes and subsidies to make homeownership more accessible. Research and inquire about any available schemes that apply to your income bracket. These initiatives may offer reduced interest rates, lower down payment requirements, or other financial incentives making the overall cost significantly lower. It is essential to have a clear strategy for repaying your home loan. Evaluate your financial goals and timeline for loan repayment.
Additionally, taking advantage of prepayment options can be a smart move. According to RBI rules, you can make prepayments on floating-rate home loans without extra charges. This helps you reduce the overall amount you owe, leading to lower interest payments and early freedom from debt. Keep in mind that fixed-rate loans may have prepayment penalties; so it is essential to consider your overall financial strategy before making any extra payments. Understanding these aspects can help you make informed decisions that suit your plans for homeownership.
The perfect home loan amount you should apply for to get easy approval
To increase the chances of getting your home loan approved easily, aim for a loan amount that fits well with your income and expenses. Consider the following:
Income Range (per year) |
Recommended Home Loan Range |
Up to Rs. 5 Lakhs |
Rs. 10 Lakhs to Rs. 20 Lakhs |
5-8 Lakhs |
Rs. 20 Lakhs to Rs. 40 Lakhs |
8-10 Lakhs |
Rs. 20 Lakhs to Rs. 40 Lakhs |
10-15 Lakhs |
Rs. 40 Lakhs to Rs. 75 Lakhs |
15-20 Lakhs |
Rs. 75 Lakhs to Rs. 1.25 Crores |
20-25 Lakhs |
Rs. 1.25 Crores to Rs. 1.75 Crores |
25-30 Lakhs |
Rs. 1.75 Crores to Rs. 2.25 Crores |
30-50 Lakhs |
Rs. 2.25 Crores to Rs. 4 Crores |
Buying a house can be financially daunting, especially with the burden of home loan EMIs. To mitigate the overall cost, considering a Systematic Investment Plan (SIP) in mutual funds can be a strategic move. If, for instance, you take a home loan of Rs 40 lakh for a property worth Rs 50 lakh at an 8.5 per cent interest rate, your total repayment amounts to Rs 83,31,103 over 20 years. By initiating an SIP equivalent to 25 per cent of your EMI (around Rs 8,678 per month) with a 12 per cent annual return, your total investment in 20 years could be Rs 20,82,480, resulting in a corpus of Rs 86,69,606. Effectively, your house worth Rs 50 lakh can be acquired for just Rs 27.43 lakh, combining the home loan and SIP strategically. This approach offers a significant financial advantage and enhances the value of your investment over time.
Prepayments and expert advice
Making prepayments is a wise strategy to reduce the overall interest burden and shorten the loan tenure. It is advisable to consider consulting with a financial advisor or a PropTech expert to gain insights into the best loan options tailored to your financial situation. They can guide you through the application process and help you understand the terms and conditions of various loans. Remember, the journey to homeownership may have its challenges, but with informed decisions, it is a dream that can become a tangible reality.
Moreover, making prepayments is a wise strategy to reduce the overall interest burden and shorten the loan tenure. Aim to repay the loan early, ideally within 8-9 years, by paying extra amounts on top of EMIs without penalties. As per RBI rules, prepayments on floating-rate home loans come without extra charges, allowing you to decrease the overall amount you owe. This leads to lower interest payments and early freedom from debt. However, be mindful that fixed-rate loans may have prepayment penalties, so it is essential to consider your overall financial strategy before making any extra payments. Understanding these aspects can empower you to make informed decisions aligned with your homeownership goals.
Akhil Gupta is the co-founder and chief product and technology officer (CPTO) at NoBroker
