JOIN USBuying a home is one of the most important financial decisions that one makes and is a key goal of every working Indian.
Considering that the real estate business in India is risky, buying a home for the first time is a nightmare for many. It is, therefore, crucial to do as much research as possible before making the big decision. Right from finding a location that is ideal for your needs to planning the home loan and the EMIs it brings along, you will come across several questions that you need the answers to. Here are some of the important aspects you need to address before signing on the dotted line:
The right time
If you think that the right time to buy a home is when the market prices are right, think again. Besides the market price, you need to consider whether you are ready in terms of finance, time and age.
Money: Buying a home is more than just taking a loan and planning finances for the EMIs. You also need to account for actual costs involved in buying a home, such as stamp duty, registration costs, maintenance deposits, broker fees and advocate fees. The growth rate of your income and your expenditures matter too.
Time: Keep in mind the length of time you can commit to the new home. Decide whether you want to buy the place or rent it. If you are unable to foresee living in your newly purchased home for at least five or more years, it is probably better to delay the purchase. Costs involved in buying and selling a home such as commissions, transfer tax and maintenence usually get spread over time. However, if you decide to shift homes within a year or two, these costs could add up to more than what you would have paid had you rented a place.
Age: This is an important factor when buying a home. If you take a home loan in your 20s or 30s, you have a longer earning period ahead. Your loan EMI burden will also reduce as your take-home salary increases. While it may be difficult to buy a home as a young professional, starting early might allow you to pay off your loan sooner. Another factor to consider is that your needs will change with your age. Thus, the home you might want to buy when you are younger might be different from the one you want to buy, say, when you are in your 40s or 50s.
All about saving
To know how much you should save when buying a home, you need to ask the following questions:
What kind of home would suit my needs for the next five to seven years?
Take 30-year-old Manoj, for instance. In 2010, his monthly income was Rs 50,000. He decided to buy a one-BHK home based on the price that fit his budget. In 2011, he got married. In 2012, he had a baby and got a promotion as well. At this juncture, he decided to move to a two-BHK. In 2015, his parents decided to move in with him and he had to move closer to his child’s school. As a result, he moved to a three-BHK home. In five years, Manoj moved twice and every time he did, he incurred additional costs on paying eight per cent tax and two per cent brokerage. This 10 per cent additional cost could have been avoided had Manoj planned ahead based on his future needs.
In addition to the price, you need to consider if the home meets your future requirements. The type of home should cater to what you may require not just today, but after five to seven years.
How much can I afford to borrow?
To find out how much you can afford to borrow, let’s take the following example: Let’s assume that your monthly income is Rs 70,000 (A), monthly expenditure is Rs 25,000 (B) and your monthly savings is Rs 15,000 (C). The amount that can be used towards your EMI is A – (B+C), that is, Rs 70,000 – (Rs 25,000 + Rs 15,000). This comes up to Rs 30,000. Let’s assume the loan tenure is 20 years and interest rate is 10.5 per cent.
The affordable loan amount is Rs 40,66,588 (E) and the interest amount payable is Rs 56,77,412 (F). So, the total repayment amount (E+F) is Rs 97,44,000. Keep in mind that the loan eligibility and interest payable varies from bank to bank. This example only allows you to assess your budget. Typically, the bank decides the loan amount based on your income, credit rating and property value.
How much should I save given the actual costs?
Now that you know how much you can afford, it is easy to find out how much you should save. Take into consideration the following:
Down payment — Experts say that it is ideal to save at least 5-20 per cent of the cost of the home for the down payment.
EMIs — Set aside a budget for your monthly EMIs and ensure you have regular income to facilitate such outgoing cash flow. Typically, your EMI amount should not exceed 30 per cent to 40 per cent of your monthly income.
Inflation rates — Consider inflation rates while calculating your budget. While increasing inflation rates may not affect your loan amount, they might affect your interest rates.
Bank interest rates — If you have taken a floating rate home loan, make sure you keep an eye on your interest rate. You can switch to a bank offering lower interest rate if required.
To make a financial decision as big as this one, it is not only crucial to plan well in advance, but to also make sufficient provisions for your anticipated expenses. Experts believe, this is where long-term wealth creation comes into the picture.
(The author is CEO, Scripbox)