I have seen many examples where the dream house has become a financial nightmare.
Yes, budget is where most people go wrong when buying a property. I have seen many examples where the dream house has become a financial nightmare.
The first payment that you have to arrange for is the down-payment. Banks will finance at most 80-85% of the property cost. So you have to put in 15-20% money from your pocket. Given the property prices, this amount itself will run into lakhs.
Therefore, how much money you can pull together to pay this up-front amount becomes your first objective. It is not uncommon to see people giving away their last rupee in down-payment or even borrow from other sources. This is a serious issue. Don't overextend yourself. You should not be paying two loans…home loan from banks and loan from other sources.
By the way, recently banks have stopped including stamp duty and registration charges in the property cost. So the entire amount on this account has to come from your pocket.
Monthly EMIs come next. These will typically run for 15-20 years. So don't repeat the mistakes that others made - they considered only their current financial obligations in fixing their borrowing capacity. You must plan your EMIs keeping in mind the future commitments too.
Remember that house is not the only financial obligation in your life. You can't compromise on children's education or medical costs. You can’t sacrifice your other desires such as mobile phones, annual vacations, electronic gadgets, car, etc. for decades.
Hence, don't go overboard with your budget. Make sure that
(a) You have some spare cash AFTER the down-payment and
(b) Your monthly loan payments DO NOT exceed 40-45% of your net take-home pay.
Beware! This is not the end of the story.
You have to account for other costs too.
One such significant expense is the annual property taxes. So before you decide on a property, find out exactly how much will be the hit every year on account of property tax.
Nowadays big societies have become a preferred option for many buyers. They offer security; they offer various facilities such a swimming pool, gym, library, etc; they offer a great ambiance. All this, of course, costs money. And hence the society charges! Make sure you also inquire about the annual maintenance charges before you buy a property.
Then you will have to buy insurance too. This will include
(a) the cost of insuring your loan and
(b) the cost of insuring the house against fire, earthquake etc.
Finally, you have to spend money on furnishing it too. From furniture for your rooms, to kitchen fittings, to ACs/fans, to interior decoration, to soft furnishing, to refrigerator/oven/microwave, to bathroom fittings, to geysers, the list is practically endless.
Account and budget for all this too beforehand itself. It shouldn't so happen that you spend your entire money in buying the house and then find yourself with nothing much to make it livable.
And yes, don't forget the house warming party!
Buying one house in one's lifetime is history. So don't overextend yourself assuming this is your first and last home purchase and hence you should buy the best even if it is beyond your budget. No. As you progress in your profession, you will find it convenient to switch to a bigger and better property. In fact, just as upgrading your gadgets, mobile phones and cars has become common, upgrading your homes too will soon become a normal affair.
Sanjay Matai is a personal finance advisor, author and online financial trainer. There's a lot more free stuff to read on his blog (thewealtharchitects.blogspot.in).