You may have the same salary, but what you can borrow from a bank against your earnings has come down signficantly, thanks to rising interest rates.
Home loan eligibility for salaried individuals has declined by up to 20% in the last 17 months due to a series of hike in the repo rate by the Reserve Bank of India (RBI), which has forced commercial banks to increase lending rates.If your monthly income is Rs 50,000 per month, in March 2010 you could have availed of a home loan of Rs 21-Rs 30 lakh for 20 years at an 8.5% interest rate. Today, your eligibility has dipped to Rs 17-Rs 24 lakh for the same period — because the interest rate is up by 3 percentage points.
In its battle against inflation, the RBI has hiked the repo rate (the rate at which banks borrow from it) 11 times, by 3 percentage points since March 2010.
“Banks decide home loan eligibility of a borrower by his capacity to pay equated monthly installments (EMIs),” said Vipul Patel, director, Home Loan Advisors. “Every hike in interest rate brings down the loan taking capacity as EMIs go up.”
Usually banks set a limit of 45% to 60% of a person’s post-tax monthly income to determine his or her EMI paying capacity. If you earn Rs 50,000 per month, your post-tax income would be Rs 45,500, and at that rate you are deemed to be able to pay a maximum EMI of Rs 27,300 (60% of Rs 45,500).
At 8.5%, your maximum loan for 20 years would be Rs 31 lakh. When the rate is 11.5%, that ceiling comes down to Rs 26 lakh.
“When banks’ cost of funds increases, they pass it on to the customers,” said BS Keshava Murthy, chief financial officer, Indian Overseas Bank.