Part I: How much home loan can you get?

In the last article we saw how much home loan would a bank or housing finance company would be willing to give you, given your level of income. In this article we will try and understand various ways through which the home loan eligibility can be increased.

Take loans for the maximum tenure possible

The easiest way to increase the home loan eligibility is to go in for the maximum tenure of repayment that a bank or a housing finance company is willing to give.

Let us 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, he saves the remaining Rs 25,000.

Now this is the amount he can use to repay the loan through equated monthly instalments (EMI).

At an interest rate of 12.5%, the EMI for a 15-year home loan of Rs 1 lakh (Rs 100,000) is Rs 1,232.5. Given this, his home loan eligibility stands at Rs 20.3 lakh (Rs 2.03 million).

The calculation for this, as explained in the last article as well, is very simple. The monthly saving that the individual can use to service his EMI (Rs 25,000 in this case) is divided by the monthly EMI (Rs 1,232.5) on a Rs 1 lakh loan. This ratio is multiplied by Rs 1 lakh, to arrive at the final loan amount, which is Rs 20.3 lakh in this case.

Now the same individual can increase his home loan eligibility by nearly Rs 2 lakh (Rs 200,000) if he goes in for repayment tenure of 20 years.

At an interest rate of 12.5%, the EMI for a 20-year home loan of Rs 1 lakh is Rs 1,136. Hence, the home loan eligibility, using the formula just explained above, comes to Rs 22 lakh (Rs 2.2 million).

Shop around for a lower interest rate

Now most banks give a home loan which has to repaid within a period of maximum 20 years. The next thing for an individual to do is to shop around and make the best use of the many banks and HFCs willing to give a home loan these days.

In the current market scenario there are floating rate home loans available anywhere between 11.5-13%.

At an interest rate of 11.5% the EMI for a 20-year home loan of Rs 1 lakh is Rs 1,066.5. Using the formula explained above, the home loan eligibility of an individual earning Rs 60,000 per month goes up to Rs 23.44 lakh (Rs 2.344 million). This is simply because at lower interest rates, EMIs are lower and hence banks give a higher loan at the same income level.

Prepay all other loans

The other good practice to follow before taking on a home loan is to repay any other outstanding loans. This increases the ability to repay for the individual and hence the bank is ready to give a greater home loan.

Take a joint loan

It is also possible to take a joint loan these days. A husband-wife team earning a combined Rs 1 lakh per month can be eligible for a greater loan vis-�-vis just one of them earning Rs 60,000 per month.

Step up home loans

Some banks and housing finance companies also give out 'step up' home loans. Under this loan, banks give out a higher loan to an individual than what he should get, given his current level of income.

The higher loan is given out on the assumption that the individual career prospects look very strong and in the days to come, he should be able to pay a higher EMI.