13 DECEMBER, 2021

Experts often suggest that your home loan amount should be affordable for you. You must always apply for an amount that you can comfortably repay. However, the word affordability can create confusion. How would you know how much you can afford? But worry not, here is a guide that can help you calculate the affordable loan amount for you.

Checklist to Determine Your Home Loan Affordability

  • Do you have an emergency fund in place?

You must ensure that your financial foundation is uncompromised before you commit to such a big amount. Home loan EMIs are a significant expense, and so you must have an emergency fund that can cover all your expenses for six months to one year so that you have a financial cushion to fall back on. Moreover, experts believe that you must also have a term plan and medical insurance for you and your family. You can determine the amount you can afford after you have allocated the expenses for these purposes.

  • Is your down payment too high?

When you apply for home loan, you will need to pay down payment upfront. The down payment amount is usually 15-20% of the total property value. Though you can pay a higher amount, you must be careful while doing so. You must not exhaust your entire savings on the down payment. Paying the down payment should not curtail your liquidity and deplete your accumulated savings.

Therefore, if you are required to pull out money set aside for other goals for the down payment, you might be borrowing more than you can afford.

  • Can you afford the EMIs?

Lenders approve a home loan amount where your total EMI does not exceed 40-50% of your monthly disposable income. So, if you are already servicing any other loan, you would get a loan amount where your total EMI is not more than 40% of your income.

If you are applying for an amount where your EMI is more than half of your income, you are borrowing beyond your affordability. However, this concept varies from person to person. Let's understand this with an example.

Mr. X earns an income of Rs 1,00,000 and spends Rs 55,000. Mr. Y earns the same amount but spends Rs 35,000. While both can take a loan amount where their EMI totals to Rs 40,000, the affordability is not the same for both. Mr. X should not opt for a loan with Rs 40,000 EMI, as he won’t be left with any savings after paying the EMI. On the other hand, an EMI of 40,000 is completely affordable for Mr. Y. Therefore you must assess your monthly budget while opting for a loan amount and use a home loan EMI calculator to ensure that your EMI is affordable.

The simple rule to decide if you can afford the loan is to assess your expenses, income, and judge the home loan EMI impact on your financial stability. Make sure to consider various lenders and go for the one that offers the lowest home loan interest rate along with other aspects mentioned. While these tips can help you find an affordable loan, you can also use a home loan affordability calculator to make an informed choice.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.