Before taking a home loan, borrowers have to necessarily consider a few aspects, and one of them is EMI affordability. A look by Balaji Rao

Availing yourself of a home loan involves various decisions and a few major ones revolve around (1) quantum of loan (2) down payment and (3) tenure of loan. Arranging for the down payment is a critical path to tread. As per a recent RBI directive, the prospective borrowers are required to make a minimum down payment ranging from 20 to 25 per cent of the cost of property or the construction cost. For instance, if the cost of a house/flat being purchased is Rs.30 lakh, the down payment of Rs.6 lakh at 20 per cent of the cost is to be borne by the borrower and the rest would be financed by the HFI.

Before taking a loan and committing oneself to the EMI payments, borrowers have to consider a few important aspects and one of them is EMI affordability. Most of the housing loan institutions’ websites provide simple EMI calculators wherein if you enter the required loan amount and the number of years of loan sought, the proposed monthly EMI at the prevailing interest rate will automatically appear.

Do your own calculations

Prospective borrowers can use this facility and do calculations on their own and see if the EMI payment capacity suits them. Start with choosing the loan amount and getting the calculated EMI amount before approaching any HFI for a loan. The default decision that a borrower is advised to make is to first arrive at the EMI payment capacity and then decide on the value of the house/construction; it should not be vice versa.

For example, if the cost of a flat/construction is estimated to be Rs.30 lakh and the loan required is 80 per cent of the cost (Rs. 24 lakh), at 11 per cent p.a. rate of interest for a period of 15 years the EMI would be Rs. 27,278. This amount should be evaluated based on the affordability which is dependent on the borrower’s age, net income, mandatory monthly expenses, any other EMIs, immediate financial commitments and such other aspects that could affect the repayment schedule over the loan tenure.

On the website of www.canfinhomes.com <http://www.canfinhomes.com> (a HFI), if you visit the “loan eligibility calculator” page and type in a monthly income of Rs.50,000, a loan duration of 15 years and rate of interest of 11 per cent, your loan eligibility indicated would be Rs.17,59,639 with an EMI capacity of Rs.20,000 per month. It is that simple.

You can find the EMI on your desired loan amount as well as the eligibility of getting a loan which can assist you precisely in your decision. Based on such numbers you can start planning for the value of house or cost of construction.

Since home loans are for a long period of time such preparations would definitely help in smoother repayments.

Also, for the down payment amount, one can consider a higher contribution of up to 30 per cent of the cost which would automatically reduce the EMI burden.

Other funds

Further, to meet the down payment amount, borrowers can consider taking a loan on Provident Fund accumulations, soft loan from employers, hand loans from friends/relatives, selling jewellery etc., besides pulling out their savings in RD, FD, and/or equities. It is also important to set aside ‘contingency funds’ of at least six months of EMI payments and monthly household commitments for the purpose of dealing with any unforeseen events such as loss of job, reduction in income, temporary disability and such other events that could affect the repayment commitment.

This amount should be kept liquid, investing in either bank FD or debt mutual funds.

Adopting a systematic and organised approach would surely help in standardising one’s financial health.

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