Normally banks decide your eligibility and gives you a loan, but how should a person on its own take a judicious call about how much loan s/he should take?

Should a home loan amount be twice your gross annual income or should it be less than that?
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  • The lesser the better..:)

    Having said that, it probably is based on the property that you finalise and the area too..

    In my case, the loan amount taken was slightly less than 2 years of gross salary to begin with..

    With prepayments and increments over the last couple of years the principal outstanding is less than 1 yr of gross salary currently.

    It is generally advisable to consider the gross salary of only one person..husband or wife (assuming both are working)

    Plan to pay it off in the next 2 years...
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  • I'd say higher the better, if you are a bull. I bought a 2 BHK and still had some eligibility left, I could've bought 3BHK, and now I think I should had.

    If you believe the prices are going to increase in long term, then higher you leverage, better you are off. As long as you can afford the emis without pulling out food out of your children's mouths :D you should go for that amount. Full amount of bank sanction should be used.
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  • Taking a loan below your capacity in my opinion is a better bet...

    Allows for lesser interest outgo and also diversification into other asset classes...

    Don't put all your eggs in one basket...RE is an important constituent of your portfolio but should not be the only constituent...
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  • Originally Posted by AnkitS
    Taking a loan below your capacity in my opinion is a better bet...

    Allows for lesser interest outgo and also diversification into other asset classes...

    Don't put all your eggs in one basket...RE is an important constituent of your portfolio but should not be the only constituent...


    I also agree that the loan amount should be as lower as possible and surely lower than your potential saving capacity over 2 years (esp for salaried people)...

    But I dont understand how taking a higher loan than required is a better diversification strategy... loan is not an egg.. its a liability
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  • Originally Posted by Mayank81
    I also agree that the loan amount should be as lower as possible and surely lower than your potential saving capacity over 2 years (esp for salaried people)...

    But I dont understand how taking a higher loan than required is a better diversification strategy... loan is not an egg.. its a liability


    can this ever be lower than saving potential? i dont think so. even 12LpA guys will not be able to save 10LpA...that makes loan amount only 20L...correct me if i am wrong but nowadays 30-50L loans have become common due to increased property values.

    if someone is earning X per year (gross) then should he go for X, 2X, 3X or 4X loan amount? Should it never exceed 3X?
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  • I think govt banks themselves say that loan eligibility is 4 times of 5 times that of annual income. Two aspects:

    1. You salary is likely to increase over years.
    2. Your rent is likely to increase over years.
    2. House is not compared to FD or stock market investment, because this is a leveraged buy at one time. You cannot compare EMI investment into SIPs, because SIPs average out costs over time, whereas loan has a defined cost at its initiation.

    Now bears will come out saying and hoping all kinds of bad stuff. One should be prepared for bad stuff, but not in a way that he completely ignores the good stuff and focuses solely on bad. I have been hearing this losing advice for a long time now, as far back as 2007, even before 2009 crash. 'Borrow as less as possible'. I hope those who heard that advice are enjoying their FDs, no more able to afford any flats which has risen at speeds far greater than FDs.

    As written by puser, 12L PA earning guy taking only 20L loan for buying his dream house is ridiculously low. A guy earning 12L now (about 60k pm after deducting all taxes and savings) should be able to afford 35k - 40k emi, so a loan of 40L is definitely feasible.

    Bears assume that EMI is liability, and those EMI invested in FDs are assets. but the EMIs are paid towards your asset only. How are they any different than monthly investment, other than the fact that you can not decrease the monthly outflow?

    For me, India still has hope, still has a lot of new entrants in real estate market. I don't share the gloom and doom sentiments with the bears. Sometimes there will be some hard blows, but in the end, the direction is upwards.
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  • My recomendation in purely Waren's terms:

    -If Loan is for 1st House (Self use) : I would prefer min Loan amount, since it would be my daily need and EMIs would be my liability
    -If loan is for 2nd House (Investment) : I would prefer Max Loan amount, since this is an investment I can consider EMI as SIP to own an asset

    While this proposition looks very Mind driven not always we can follow it, as I want to own a house which not only meets my requirements but also extends them and is better than what my cousin or freind owns. So typical heart driven decission of owning 1st home ruins the earlier proposition and in this case I suggest taking max loan as well, because what I have learnt/seen in past and analysing different possibilities in Indian RE future I see people loosing affordability with time, which means if you can buy a 1 cr house today 2 years later you would not be able to own the same house as generating such high returns from other invetments is difficult (not impossible).


    Though I would recomend max loan in one more case i.e. if 1st House is UC, idea behind this is to diversify your risk.
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  • Originally Posted by Mayank81
    I also agree that the loan amount should be as lower as possible and surely lower than your potential saving capacity over 2 years (esp for salaried people)...

    But I dont understand how taking a higher loan than required is a better diversification strategy... loan is not an egg.. its a liability


    Diversification can be achieved by not leveraging too much..Lesser loan amount means more money available to invest in other asset classes..you've interpreted it the other way around..
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  • well guys, i believe borrow what you need (not what you want). i am going to borrow 3 times gross fixed salary...and emi is coming little less than half take home salary...property is under construction, so tax benefit would be available only after possession...saving would be 30k per month...going to put all cash reserve towards this property (excluding stock holdings, long term saving schemes.mutual funds, gold etf + physical gold and emergency cash reserve)
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  • First property should be as far as possible without any loans/bare minimum loan.Second property can be on loan.Home loans wisely taken is not a debt in literal sense.It helps you acquire an asset which will appreciate over some time.
    Loan is to be taken carefully-amount of loan,tax benefits,EMI,How much is the rent going to help repay EMI,How you will tackle period when tenant is not there?
    Loan amount can be determined by a holistic study of your finances.
    I would work out my loan amount for second house by working out how much money can be shifted from lesser interest earning assets towards home purchase and then balance amount for taking loan.Reserve amount of funds will always be kept aside before determining the loan amount.
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  • Originally Posted by vaibav123
    ]First property should be as far as possible without any loans/bare minimum loan.Second property can be on loan.Home loans wisely taken is not a debt in literal sense.It helps you acquire an asset which will appreciate over some time.
    Loan is to be taken carefully-amount of loan,tax benefits,EMI,How much is the rent going to help repay EMI,How you will tackle period when tenant is not there?
    Loan amount can be determined by a holistic study of your finances.
    I would work out my loan amount for second house by working out how much money can be shifted from lesser interest earning assets towards home purchase and then balance amount for taking loan.Reserve amount of funds will always be kept aside before determining the loan amount.

    buddy tough to understand what you're saying. are you saying there should as minimum loan as possible on property?

    buddy tough to understand what you're saying. are you saying there should as minimum loan as possible on property?

    buddy tough to understand what you're saying. are you saying there should as minimum loan as possible on property?

    buddy tough to understand what you're saying. are you saying there should as minimum loan as possible on property?
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  • What I tried to communicate was simple: First property as far as possible no loan and second flat/house an amount of loan taking into account all financial parameter,earning capacity etc.No fixed formula to work out amount.It varies from person to person based on his thought process,perception etc. I dont mean minimum amount of loan but right amount of loan. .
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  • its difficult to buy a home without loan nowadays especially first home..
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  • Originally Posted by puser
    its difficult to buy a home without loan nowadays especially first home..


    Ok i would wish to make a correction on an over simplistic thumb rule i mentioned yesterday.. viz. "loan should be lower than 2X of your saving capacity"..
    Ofcourse for different people this will be different and some really thoughtful comments quite correctly mention that one should take into account repaying capacity and savings potential (on rentals) and whether its first house or someone already has another asset (that may be liquidated if going gets tough)..
    People with stable jobs or married couples where both partners are working can surely go for more.. but as someone just mentioned "one wants better house than his/her cousin".. this should not be driving your decision.. read the book called "Rich dad poor dad".. though mostly a crap book.. it does give good suggestions on when can you say your house is a liability and when you can say its an asset.. too many young people even in developed countries fall for trap of large debt.. to only live constrained live for several years.. no vacations.. no car.. no fun.. the initial rush of having bought an expensive property can quickly turn into nightmare.. esp if u are too dependent on your job.. you lose that ability to walk out on your boss.. and thats just a start...:)
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  • 2x saving capacity - so for a guy with 10LpA, his earning capacity is 20L ...so his saving capacity is going to be less than 20L....so lets say he still saves 15L in 2 years that turns out to be loan amount he should go for...15L for home loan for 10LpA...don't think its too less? What can u get in 15L loan + self contri say 25L. in today's real estate market?
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