As he climbed the stairs of the station, he realised he was late and would miss the train. And so he rushed for it.
In a higher interest regime, your home loan eligibility comes down.
MUMBAI: As he climbed the stairs of the station, he realised he was late and would miss the train. And so he rushed for it. Chance and hope, he felt, were the two most important elements of surviving in Mumbai. And he was right. He managed to hop on to the train as it was leaving the station.
He had had been thinking of buying a house for sometime. But interest rates on home loans had risen.
Two months back, he had talked to a banker and he was promised a floating-interest rate home loan at 9%. However, at the last moment, things fell through and he had to drop the idea of buying a house.
Now, he had located a good flat and wanted to buy it. But the same bank had raised interest rates to 9.5%.
Not just that, the bank was ready to offer him only a lesser amount, this time around. What had changed in the two months that he deserved a lesser loan? he wondered.
He had logged onto the bank’s website, and used the loan calculator to calculate the amount he was eligible for. He earned a total salary of Rs 50,000 per month. At a floating-interest rate of 9% and for a 20-year term, he was eligible for Rs 24.25 lakh.
With the current interest rate at 9.5%, his eligibility had fallen to Rs 23.27 lakh. He simply could not fathom the logic behind this.
The loan that a bank gives is arrived at by dividing the monthly amount that can be used to service the equated monthly instalment (EMI) for the repayment of the home loan by the EMI for Rs 1 lakh. This ratio is multiplied by Rs 1 lakh to get the home loan.
So, let’s say he saves around Rs 22,000 per month. This amount can go towards servicing the EMI for the loan repayment. The EMI on Rs 1 lakh at the rate of 9% would be Rs 900. This way, he would be eligible for a loan of Rs 24.44 lakh. The EMI on Rs 1 lakh at the rate of 9.5% would be Rs 932. So the home loan he would be eligible for would be Rs 23.60 lakh.
In practice, however, it is difficult for home loan companies to figure out the expenses of each and every individual who applies for a loan. So, based on a household expenditure data and their own past experience, they assume a certain proportion of income, which can be used to service the loan. All this information is built into a loan calculator, and the loan amount is decided on the basis of that.
The logic behind the loan amount going down is very simple. As interest rates go up, EMIs go up, and at the same income level, the ability to service a higher EMI goes down. Accordingly, banks prefer to give out a lesser loan amount.
Also, home-loan companies prefer giving around 80-90% of the property cost as loan. If the flat costs Rs 25 lakh, an institution could choose to finance around 85% and give a loan of Rs 21.25 lakh, even though the eligibility, according to the borrower’s level of income, could have been more.
Till some time back, some institutions were flexible with this criterion, and if the property being bought was a new one, they even sanctioned the full amount. But with interest rates going up, institutions have gone back to funding around 85% of the property cost.
(The example is hypothetical)
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