The Math of Home Loans

How to accurately calculate eligibility? To make our dream home, we need the finances from a lender and for that we first need to compute our eligibility for home loan.

6 Feb,2017 23:30 IST 276 Views
The Math of Home Loans

“Everything in the Universe is made of math including you” as by Max Tegmark M.I.T Professor

Math is very important in our life. We are driven by numbers and if we are planning something, we crunch the numbers for making a wise decision. The mortgage industry is no exception. So how are the numbers important in housing finance?

We calculate savings, expenses and then devise our strategy for availing a home loan. To make our dream home, we need the finances from a lender and for that, we first need to compute our eligibility for a home loan.

How to accurately calculate eligibility?

Thanks to technology! We can do our eligibility math on Home Loan EMI Calculators. These calculators ask the applicant’s personal details like date of birth, PAN Card Number and professional details like monthly income, organization's name and tenure in current firm etc. It is noteworthy that the calculators that ask for more information are generally more accurate. It is necessary to use a home loan eligibility calculator of the region, where we are purchasing the property because local and government rates may apply accordingly.

While doing the math, most of us think that we will end up paying double the amount borrowed from our lender. The repayment will include principal, interest, loss of interest on savings, stamp duty & registration cost and government charges on loan acquisition. On the other side of the coin, we will find that the value of the property will also shoot up manifold and we can live happily in our own home after taking possession of the same.

Case Study:

Sumedha Sharma, age 35, working as a legal manager at a renowned LPO in Gurgaon, earns Rs 70,000 per month. She wants to purchase a home at Noida for Rs 40 lakh. She applied for a home loan of Rs 32 lakh for the tenure of 10 years. The bank rejected her application stating a reason that home loan can be sanctioned only up to Rs 24 lakh for her case. How can this be sorted out? What numbers are required to solve her home loan eligibility problem?

Interestingly after some time, she again applies at the same bank with same terms & conditions she increased the tenure of the home loan to 20 years. Her home loan application was approved this time. This show our eligibility for a home loan can be increased by enhancing the tenure of the home loan.

But suppose, if Sumedha has to pay the installments of any running loan or car loan, then her eligibility for the home loan would reduce. There are a plethora of formulas and calculations that NBFCs and banks use for computing home loan eligibility but the basic logic revolves around what have been mentioned in this case study.

So are you ready to do your math on our home loan calculator?

Disclaimer: The information contained in this post is for general information purposes only. IIFL Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. Given the changing nature of laws, rules and regulations, there may be delays, omissions or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Gold/ Personal/ Business) loan product specifications and information that maybe stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Gold/ Personal/ Business) loan.

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