Yesterday while watching TV, a commercial caught my attention. The commercial was by Aditya Birla Finance Home Loans – Know Your True Worth. The advertisement emphasized how you should find your true worth as a borrower for property purchase. In layman terms, home loan eligibility value should reflect the true worth of an individual. It helps the borrower to buy the dream house of his/her choice. Take a look at the commercial below:
In the past, I have shared a couple of posts on home loan eligibility value. In one post, How Home Loan Eligibility is Fixed, I shared the factors that can influence your home loan eligibility value. The million dollar question is: Whether these factors reflect the true worth of a borrower in terms of home loan eligibility value.
The Aditya Birla Finance Home Loans video delivers this message. A successful and reputed businessman is renting a home in a remote location. His residence is far from his new factory. His mother insists that he should buy his own house. In other words, there is a mismatch between his professional success and true worth in terms of owning a property. He is worthy enough to own a property near his factory in a better location. Maybe he is unable to avail a home loan as he is a self-employed businessman.
To substantiate the claim in the ad, I personally checked my home loan eligibility value on the website: www.trueworth.co.in. Quite interestingly, it also considers additional yearly income to calculate home loan eligibility value. This section considers the yearly bonus or any other recurring variable income that is generally ignored by other home loan providers. Normally, for a salaried individual a home loan provider only consider net take home salary to fix home loan eligibility. Hence, self-employed professional/businessman finds it difficult to avail home loan. In my case, on comparison with other home loan providers, the home loan eligibility value calculated by Aditya Birla Finance Home Loans was much higher. Therefore, it might be beneficial for potential borrowers who are looking for higher home loan eligibility value. Just to clarify that LTV or Loan to Value ratio will remain same as per industry norm. You may be eligible for higher home loan value based on income criterion but loan value cannot exceed 80% of the property value. LTV is 90% for the property value of upto Rs 30L and 75% if the property value is more than Rs 75L.
Why do we need a Home Loan?
For many borrowers, the property is the single biggest purchase they make during a lifetime. A friend of mine, staying on a rent is a firm believer in financing his property from his savings. Frankly, it is impossible. The rate of savings cannot outpace the property appreciation after adjusting rent. The reason being, the property is an appreciating and productive asset. In India, due to financial illiteracy, many people fail to calculate the opportunity cost. For example, rent is an opportunity cost. My friend is willing to pay rent but not willing to pay the home loan interest. A rough calculation shows that it is financially beneficial to avail a home loan for self-occupation compared to staying in a rented accommodation. I purchased my house 10 years ago and foreclosed a home loan 3 years back. My friend is still staying on a rent.
Secondly, a home loan EMI is a direct or indirect forced savings. It helps in long-term asset creation. If my income is Rs 100 and disposable income is Rs 90 (after adjusting rent) then I will tend to spend more with more disposable income in hand. On the other, if I pay an EMI of Rs 60 then I will tend to spend less from balance Rs 40. It may look difficult but practically possible. You may ask anyone who has availed home loan :)
Compromise on Property Purchase
One of the key reasons for not buying a property is that people would not like to compromise on their dream home. For example, I am planning to buy a 3BHK depending on my requirement. My existing home loan eligibility value permits me to purchase only 2BHK. It is a very common scenario. Here the true worth of an individual plays a crucial role. Besides apartment size, some borrowers would not like to compromise on the location/area. For example, one of my clients was looking for a 2BHK in Navi Mumbai area. His preference was Ulwe but based on his home loan eligibility value his choice was restricted to Taloja.
Banks fixed his home loan eligibility value at Rs 40L i.e. he could only purchase property worth max 50L which includes stamp duty and registration charges. The banks refused to consider his variable salary that was a considerable amount. Therefore, he dropped the idea of property purchase. He was working as Sales Manager in FMCG and 40% of salary was variable income. Because of this anomaly, the home loan eligibility value was low. Practically speaking Rs 40L home loan was not reflecting his true worth. This is one of the examples and I can quote numerous such examples. Based on my interaction with clients, I can understand how they feel and feel a connection with the true worth advertisement campaign. If an individual is declaring the variable/misc. income in his income tax return then there is no reason to exclude it for home loan purpose.
Higher Home Loan Eligibility Value
In my post, Tips to Increase Home Loan Eligibility Amount, I shared some of the tips to increase home loan eligibility. The first suggestion for a salaried individual was to tweak the salary structure. In short, I suggested reducing variable income and increasing fixed component. Though this tweaking will increase the home loan eligibility value but at the same time, it will increase tax outflow. Therefore, it is catch 22 situations for a borrower. Many of my readers wrote to me asking whether it is feasible to increase home loan eligibility value without increasing tax outflow. In such a scenario, potential borrowers can explore a home loan option from home loan providers like Aditya Birla Finance Home Loans. It is especially beneficial for borrowers with high variable or miscellaneous income at regular/fixed intervals. The only precondition is that such income should be reflected in your ITR and bank statement :).
There is one more category of borrowers who work part time and earn additional income. For example, one of my friends who is a Chartered Accountant works full time for an organization. During the weekend, he works for some small companies. He religiously pays tax on his additional income and income is pretty stable in nature. Therefore, this additional income can be included in his salary income to fix home loan eligibility value.
Correlation between Property Value and Home Loan Eligibility Value
Typically, home loan eligibility value is fixed purely based on the individual parameters like income, age, job, CIBIL score, no of dependents etc. Banks do check property value but it is just to ensure that home loan eligibility value should not exceed property value. Now, what if the property value is much higher compared to the home loan eligibility value. Under normal circumstance, higher property value does not impact the home loan eligibility value of a borrower. In my opinion, it is incorrect approach. In this regard, I would like to quote a best practice from private lending. The loan amount is directly proportional to the value of the collateral. In the case of a home loan, the property is collateral. The Higher property value should mean higher home loan eligibility value. In other words, the true worth of an individual being a property owner should be HIGH. Some of the Home loan providers do consider property value for home loan eligibility value. Therefore, borrowers may clarify this point from home loan provider before signing on the dotted line.
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