It is really important that we do think of the financial implications the house will have on other aspects of our lives.
While the effects of demonetization still unravel, one of the things that might be positive for individuals is that the property prices might get more reasonable as the government tries to fight black money, make the real estate sector more transparent and focus on affordable housing. Although there is a lot of excess inventory built in a few cities, builders have not cut property prices. A home is a dream come true for most of us, so when it comes to buying that first property, we usually think with our hearts rather than our wallets. While sometimes, it’s alright, a house is a major purchase and is usually our biggest investment . So, it is really really really important that we do think of the financial implications the house will have on other aspects of our lives.
A few things you must do:
Buy a house that you like and in vicinity that you would like to live in: While the budget is something that we probably cannot tamper with too much, what you definitely would not like to compromise is on the quality of life. The area that you live in should be to your liking and proximity to schools, hospitals etc, whatever matters to you should be considered before finalizing the house. Prepare a list of items you would and would not like to compromise on: like the size of the house, locality, builder, floor etc. All of these will have material impact on the cost of the house.
EMIs should not exceed 30-40% of your income: While this is the thumb rule, you should consider what seems comfortable to you. You should also account for EMIs moving higher at a later point in time if rates increase or if you would like to reduce the tenure of the loan. The loan tenure is usually 15-20 years which is a long period of time and we don’t know what could happen in the interim, so keep your commitment here lower than 40% of your monthly income.
Take a floating rate of interest: At this point of time, when rates are moving downwards, it is a good idea to opt for floating rate of interest. This means that if rates are cut, your rate of interest might also be lowered although it may not be by the same quantum. Do shop around for competitive rates of interest before finalizing. Usually, home loan providers will give discounts/ offers to new customers.
Check your loan eligibility before buying a house: Your eligibility for buying the house depends on your occupation, your monthly income, the value of your property (if you have one identified) and the number of dependants.
Get the documents vetted by a lawyer: Many skip this as they consider it an additional cost but knowing if the title is clear and if they have the required approvals & certificates will help you sleep soundly.
Keep an emergency budget of six months of EMI handy at any point in time so that even in the worst scenario, you don’t have to fall behind on payments.
Insuring the loan usually happens at the time of the loan, so do ensure you have taken care of that too. This would mean that in case of your untimely death (before paying off the loan) the loan is insured and hence liability would not be passed on to your loved ones.
A few things to avoid when buying your first home:
Do not take a loan for down payment: I know of various individuals who take personal loans to either fund a part of the down payment amount or the registration costs. Personal loans are one of the most expensive loans and hence must be avoided for this purchase at least.
Do not stretch your budget: I know you’d justify this by saying it’s a “once in a lifetime” purchase. But trust me, there are so many other expenses that come along and if you stretch the initial budget, everything else also is a factor of this and costs surge!
Do not forget to provide for furnishing expenses: Newsflash! Interiors, furniture, appliances- they all cost. You have to account for these too.
Also a word of caution to end the article with- do not fall prey to schemes that look unrealistic. Be it in terms of costs, timelines promised- anything which seems too good to be true, probably is. Stay away!
Do not let it be your only investment: The biggest lesson I’ve learned from thousands of interactions is that usually this is your only investment. People who have taken loans for buying property (and most of us have) want to then close the loan at the earliest, thereby not building on your portfolio at all. The only asset you have is your home. How reassuring! So, while this can be your biggest investment, don’t let it be your only one!
The writer is COO of International Money Matters