Every generation is different. My father bought a flat after working for more than two decades, and that too only when the company he worked for agreed to give him a loan. The concept of home loans did not exist then or even if it did, he surely did not know about it.

Most friends of mine have bought a flat within the first five years of starting to work. The difference between then and now is the fact that now home loans are very easily available. Earlier, they were not.

The first thing that a bank or a housing finance company giving out a home loan takes into account is the capability of an individual to repay the home loan.

Let us try and understand this through an example. An individual earning a monthly take home salary of Rs 60,000 approaches a bank for a home loan. His monthly expenditure currently stands at Rs 35,000. Currently the individual does not have any other loans of pay off. Hence, the remaining Rs 25,000 he saves. Now this is the amount he can use to repay the loan through equated monthly installments (EMIs).

The EMI for a home loan of Rs 1 lakh (Rs 100,000)to be repaid in 20 years at an interest rate of 12.5% per annum works out to Rs 1,136. Hence, the home loan this individual would be eligible for is around Rs 22 lakh (Rs 2.2 million).

The method for arriving at this figure is very simple. The monthly saving that the individual can use to service his EMI (Rs 25,000, in this example) is divided by the monthly EMI on a Rs 1-lakh loan. This ratio is multiplied by Rs 1 lakh, to arrive at the final loan amount, which is Rs 22 lakh in this case.

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Another interesting aspect that arises here is that lower the interest rate higher the loan amount an individual is likely to get at the same level of income. Till a couple of years back, the home loan interest rates were in the range of 7-8%. The EMI for a 20-year home loan of Rs 1 lakh to repaid at an interest rate of 8% per annum works out to Rs 836.5.

Using the same formula explained above an individual earning Rs 60,000 a month and having an expenditure of Rs 35,000 per month would be eligible for a loan of Rs 29.9 lakh (Rs 2.99 million). Hence a rise in interest rate of around 4.5% has brought down the home loan eligibility of the individual by around Rs 8 lakh (Rs 800,000).

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As interest rates rise, EMIs rise too. Hence at the same level of income, the ability of an individual to pay up a higher EMI comes down. Along with this the problem of property prices going through the roof has been a double whammy for individuals looking to buy their dream house.

The problem with this approach is that it is not feasible for banks to repeat this exercise of trying to find out the expenditure for each and every individual that wants to loan. The reason being that different individuals have different lifestyles and hence different levels of expenditure.

Also any bank which tries to follow an individual centric approach will end up wasting a lot of precious time. Given this, banks assume a certain percentage of income as saving for various levels of income and accordingly give out home loans. This percentage goes up as the income level goes up.

The Web sites of most banks and housing finance companies giving out home loans have a loan eligibility calculator. Using the loan eligibility calculator on available on the Web site of Housing Development and Finance Corporation (www.hdfc.com) we see that an individual with an income level of Rs 60,000 is likely to get a loan of Rs 22.08 lakh (Rs 2.208 million).

Another thing to keep in mind is the fact that most banks are conservative in their lending. In the current high interest rate scenario, banks like to lend 80-85% of the value of the property.

Hence, if the value  of the property is Rs 25 lakh (Rs 2.5 million), banks are likely to give a loan of around Rs 20 lakh (Rs 2 million) -- assuming 80% of Rs 25 lakh -- even though the individual may be eligible for a higher loan amount of Rs 22 lakh.

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