Deepak was working in a software firm where he find his job to be satisfying and secure at least in a visible future. As soon as he reaches a saving amount of Rs. 10 lacs, he thought of buying a flat. He knew that he will not get the property of his choice in this budget and he has to take a home loan but the question is how much loan should he take. What should be his ideal budget…
This is a typical question which comes into the picture especially taking such big decisions in life, where you need to borrow. Now let us try to find answer to this.
But before wondering on how much we should take, let us understand how much we can get.
First criteria to find basic figure of the budget is to calculate the exact value of your saving that you intend to use for this purpose and make it 5 times. In the case of Deepak, since his saving were 10lacs, so his estimated budget to buy a flat will be 50lacs. This is because any bank will insist on 20 percent contribution and give out loan upto 80% only of the property value. However budget may cover other cost of acquisition also like stamp duty, registration etc.
Another criteria which a bank look out for is to gauge EMI paying capacity. Generally, banks believe that a person can pay maximum of 50% of his take home salary towards EMI. However, if any other loan is pending for more than a year, the value of EMI also gets deducted from the paying capacity. Take home salary excludes the tax deducted and other deductions like PF etc. An approx. idea of an EMI can be taken by considering Rs. 1000 per lac per month for a 20 year loan. So in case of Deepak, he has Rs.90,000 as his take home salary and he is paying an EMI Rs.10,000 per month towards the payment of car loan. The loan value eligibility will be 50% of 90,000 i.e. 45,000 less 10,000, which comes to the EMI paying capacity of Rs. 35,000. Estimating with EMI of Rs. 1000 per lac for 20 years, the loan eligibility comes to 35 lacs.
(Please note that these norms may vary on bank to bank or case to case basis. Please treat this just as reference and visit your bank for exact details)
So his budget for buying a flat, will be his savings plus the loan amount, which will derived as the lower of the above two criteria i.e. Rs. 45 lacs.
Now this is the maximum limit what he can touch whereas how much to borrow is a decision on personal front. The answer to this lies in the range between a desire of a beautiful house on upper side and financial security while repayment on the lower side.
Loan in its 20 years period will witness various upside and downside of economic cycle. In a good times, you might see salary raises where significance of EMI value reduces and in bad times which may be full of job insecurity, increase in interest rates thus increasing EMIs and what not but a dried up liquidity in property markets.
We may keep our Loan amount on the maximum side and to safeguard ourselves from the risks in bad times, we may use following tools.
Insurance – Banks or Insurance companies now offer schemes that cover the owner as well as property. Their are policies that also cover the payment of certain number of EMIs in case of job loss. The insurance may be purchased as one time premium where certain banks also cover this in loan amount.
Create buffer – Another way is to reduce the contribution and keep some buffer to cover EMIs in bad times. Such amount may be kept in FDs or in current account adjoined with home saver loan facility.
We should never forget that with home loans, we are leveraged to create an asset and we should never be in a situation where we have to think of selling our home. Leverage works in our favour only when it is under our control. And when it goes out of control, it may end up making more losses for us then expected. However on the front of buying a property, we should always try to cover our needs for future as repeated property transactions may bring in additional costs like stamp duty, registration charges, brokerage etc.
Coming back to Deepak’s case, he bought a two bedroom flat for 40 lacs where he has spend another 2 lacs towards cost of acquisition. He took a insurance cover spending another one lac. He took a loan of 35lacs and contributed 8 lacs from his savings. Remaining amount of about 2 lacs, he kept for home decoration which he intend to spend gradually in next 1-2 years. . Now his full attention is towards choosing colour of the walls rather than worrying about loan repayments.
