The loan amount sanctioned depends on a host of factors. Primarily, it depends on your income and repayment track records. But besides that, the cost of the property to be purchased is also a deciding factor. So, while you are looking for a home loan lender, simultaneously make concrete efforts to identify a property.
Your ability to repay your housing loan is based on your income and expenditure pattern. For instance, if your monthly income is Rs 10,000, and your monthly expense is Rs 8,000, you can certainly pay Rs 2,000 towards any potential home loan you take.
This amount can now be used as the installment amount and your eligibility can be reverse-calculated. This is easy. The following example will demonstrate the eligibility calculations.
At an interest rate of 9%, the monthly installment of a Rs 1 lakh, 20-year loan is Rs 900. Banks then calculate your eligibility using a simple formula:
Home loan eligibility in lakh is equal to the amount determined by the bank as available for loan repayment divided by loan installment per lakh for the selected tenure.
Loan eligibility = Rs 2, 000/900 x 1 lakh = Rs 2.2 lakhs
Obviously, the larger your repayment capability, the higher will be your loan eligibility.
In the same example, if the bank also takes into account the amount of rental (say Rs 1,000) that you will save as a result of moving into your own house and thus calculates the amount available for loan repayment as Rs 3,000 (by adding Rs 1,000 to the Rs 2,000 you had earlier), then the eligibility will shoot up by 50% to 3.3 lakhs as follows:
Loan Eligibility in lakh = Rs 3, 000/900 x 1 lakh = Rs 3.33 lakh
In actual practice, however, it is difficult to estimate the monthly expenses of each borrower separately. Which is why banks use a pre-determined percentage of your income as being available for paying the loan installment, based on their past experience as well as available household expenditure data.
For instance, a bank may assume that if your income is Rs 20,000 per month, 40 per cent of that (i.e. Rs 8000) will be available for repayment. Then, they calculate the loan eligibility accordingly.
This percentage also varies depending on your income on the assumption that those with higher incomes should be able to spare a higher percentage of their income for repayment. Hence, the bank could have slabs like:
For income up to:
Rs 9, 999: 35%
Rs 10, 000 to Rs. 14,999: 40%
Rs 15, 000 to Rs 19,999: 45%
Rs 20,000 and above: 50%
As per this formula, if your monthly income is Rs 10,000, the loan eligibility is:
Amount available for payment of loan installment = Rs 10,000 x 40% = Rs 4,000
Loan eligibility in lakhs = 4000/900= Rs 4.44 lakhs
If your income is Rs 20,000 your loan eligibility is calculated as follows:
Amount available for payment of loan installment = Rs 20,000 x 50% = Rs 10,000
Loan eligibility in lakhs = 10,000/900= Rs 11.11 lakhs
Thus, even though the income only doubles from Rs 10,000 to Rs 20,000, the loan eligibility could be 2 times as per this increasing percentage formula.
But whatever the norm, invariably, for the same income, the eligibility for a longer tenure loan will be much higher.
For instance, if your monthly income is Rs 15,000 and if, as per the bank’s formula, they assume you can afford Rs 7,500 (50%) for monthly repayment of the home loan, your loan eligibility is calculated as follows:
At an interest rate of 9 per cent, the monthly installment for Rs 1 lakh for a tenure of 5, 10, 15 and 20 years will be Rs 2,076, Rs 1267, Rs 1,014 and Rs 900 respectively. In this case, you can use the simple formula above to calculate your eligibility:
|For a 5 year loan||7500/2076 x 1 lakh= Rs 3.61 lakhs|
|For a 10 year loan||7500/1267 x 1 lakh= Rs 5.92 lakhs|
|For a 15 year loan||7500/1014 x 1 lakh= Rs 7.4 lakhs|
|For a 20 year loan||7500 /900 x 1 lakh= Rs 8.33 lakhs|
Thus, you can see that for the same income, the eligibility for loan is higher for longer tenure loans.
You can also check the ‘advanced home loan eligibility calculator’ to calculate the approximate loan amount if you have an existing loan.
Check the Home Loan Eligibility Calculator if you are salaried or the
Home Loan Eligibility Calculator for Self-Employed if you are self-employed.