Home Affordability — How Much House Can You Really Afford?

Home Affordability — Calculating How Much House You Can Actually Afford

The question “how much house can I afford?” has two answers: the amount a bank will lend you, and the amount you should actually borrow. These numbers are often very different, and confusing the two is one of the most common and costly financial mistakes homebuyers make.

Banks determine your maximum loan eligibility based on your income, existing debts, credit score, and the property value. Their calculation answers “what is the maximum we can safely lend?” — but “safely” from the bank’s perspective means “we are reasonably confident we will get our money back,” not “this borrower will be financially comfortable with these payments.”

The Bank’s Calculation: Maximum Eligibility

Most Indian banks use two ratios to determine home loan eligibility:

Fixed Obligation to Income Ratio (FOIR): Your total monthly debt obligations (including the proposed home loan EMI) should not exceed 50-60% of your net monthly income. If your take-home salary is ₹1,00,000/month and you have an existing car loan EMI of ₹12,000, the bank allows a home loan EMI of up to ₹48,000-60,000 (depending on the lender’s FOIR limit minus your existing ₹12,000).

Loan-to-Value (LTV): Banks typically lend 75-90% of the property value. For a ₹80 lakh property at 80% LTV, the maximum loan is ₹64 lakhs. You need ₹16 lakhs as down payment plus an additional 5-7% for registration charges, stamp duty, and legal fees — meaning you need approximately ₹21-22 lakhs in cash to buy an ₹80 lakh property.

Your Calculation: Comfortable Affordability

A more prudent approach uses the 28/36 rule: spend no more than 28% of gross monthly income on housing costs (EMI + property tax + insurance + maintenance) and no more than 36% on total debt obligations (housing costs + car loans + credit cards + other debt).

On a gross salary of ₹1,50,000/month, the 28% rule limits housing costs to ₹42,000. If property tax, insurance, and maintenance total ₹7,000/month, your comfortable EMI is ₹35,000. At 8.5% interest for 20 years, an EMI of ₹35,000 supports a loan of approximately ₹41 lakhs. The bank might approve ₹55-60 lakhs based on FOIR, but ₹41 lakhs is what you can comfortably afford while maintaining savings, emergency funds, and quality of life.

Costs Beyond the EMI

The EMI is the largest housing cost, but several other expenses are often underestimated by first-time buyers:

Maintenance charges: Apartment societies charge ₹3,000-15,000/month depending on amenities and city. This is a permanent monthly cost that begins on possession and increases annually.

Property tax: Varies by city and property value, typically ₹10,000-50,000 per year for apartments in metro cities.

Home insurance: ₹5,000-15,000 per year for a standard homeowner’s policy covering structure and contents.

Interior and furnishing: A new apartment typically needs ₹5-15 lakhs for interior work, modular kitchen, wardrobes, and basic furniture — costs that come on top of the down payment.

Repairs and maintenance: Budget 1% of the property value per year for ongoing repairs. For an ₹80 lakh property, that is ₹80,000/year or ₹6,700/month.

The Down Payment Decision

Making a larger down payment (25-30% instead of the minimum 10-20%) has three benefits: lower EMI, lower total interest paid, and potentially a better interest rate from the bank (lower LTV reduces the bank’s risk). The tradeoff: a larger down payment means less cash for emergencies, investments, and the inevitable costs of moving and furnishing.

A reasonable compromise: make a 20% down payment, keep 6 months of EMI as an emergency fund, and budget separately for interior and furnishing costs. If this calculation requires a total cash outlay you do not have, the property is currently beyond your affordability range regardless of what the bank is willing to lend.

Calculate your comfortable home buying budget with our Home Affordability Calculator — it factors in income, existing debts, down payment, and all ongoing costs to give you a realistic budget.