In our last blog I had discussed what banks or credit institutes look for while sanctioning housing loans. We saw how banks look into a proposal from 3 angles that is

1.           Financial discipline of the applicant or customers

2.           Financial capability of the customer

3.           Asset quality

we discussed in our last blog regarding financial discipline being the foremost and most important factor during credit appraisal for a housing loan.

Today we will discuss about the financial capabilities of the customer which the banks look into and decide the quantum of the loan depending on repayment capacity of the customer

Now what do we mean by financial capability or repayment capacity of a customer.

Repayment capacity or financial capability is the capacity of the customer to repay the loan on time. Banks or credit institutions want to ensure that the customer or the borrower can repay the loan EMI comfortably and without any default.

Banks analyse several factors to assess the repayment capacity of the customer, such as:

1. Monthly income (Salary Income, Rental incomes if any etc)
2. Monthly financial obligations (Existing Loan EMI’s)
3. Existing liabilities (credit card dues, rent, medical insurance premium, children fees etc.)
4. Stability of your income source (Whether Job is permanent or contractual, stability of Job etc)
5. Age of the customer (repayment depends on the age as the younger you are eligible for a longer repayment period and more loan, less EMI)

Banks expect at least 55 to 65% of your monthly income after deductions of monthly financial obligations to be available to pay for the EMI’s of the current applied loan. So, in a nutshell, higher is your monthly income and lower is your monthly financial obligations, the chances of sanction of your housing loan are higher.

Let us understand this by a example

Mr Nayan KR is a salaried person, aged 30 years has a monthly gross income of Rs 1.00 Lakhs

Now, He also pays a medical insurance of Rs 12000.00 per year and children fees of Rs 24000.00 per year. He has also taken a car loan and paying an EMI of Rs 5000.00 per month.

So, if we calculate the repayment capacity

Now, as discussed Banks expect 55-65% of your income after deductions to be available for repayment of the loan EMI’s. We take it as 65% as standard. This is called by many Banks as sustenance factor. Remaining 35% should be left in customer hand for his/her expenditures and survival. This sustenance factor varies from Bank to Bank.

By the above calculation, Mr Nayan KR is eligible to pay maximum of 65% of Rs 86000.00 = Rs 55900.00. So, Mr Nayan KR can repay max Rs 55900.00 every month but for how many years. Maximum banks sanction housing loan to salaried class till age of 60 years and Business class till 75 years but there may be exceptions and vary bank to bank. Max housing loan by Banks is given for 30 years. There may be exceptions.

So, Nayan KR age is 30 years and salaried, he can take loan for 30 years. So, finally, he can pay Rs 55900.00 per month for 30 years. If we take housing loan rate of interest is 7% per annum, then per lakh EMI at 7% pa for 30 years is Rs 665.00. (reference https://www.unionbankofindia.co.in/english/emicalculator.aspx)

So, as per Mr Nayan KR financial capability/repayment capacity, he is eligible for Rs 55900.00/Rs 665.00 = Rs 84.00 Lakhs which is repayable in 360 EMI’s.

From the above simple illustration, I believe you will be able to calculate your financial or repayment capacity and will be a financially learned person while approaching a Bank for your housing loan. This is just a brief and simple calculation to make it easy to understand. Also, you can visit https://www.unionbankofindia.co.in/english/home-loan.aspx for more information for housing loans from Union Bank of India.

In the next blog, we will discuss about Asset quality which is a very important factor while finalising a credit proposal. Thank you and stay tuned