Manikaran SingalThe recent statement of Dr Raghuram Rajan that the property prices in India should come down has raised hopes of many genuine buyers who were sitting on side lines waiting for reduction in property prices. Though real estate market seems to be in doldrums, the prices are still out of reach for many buyers. Along with expectation of low prices in future, economy overall is looking for reduction in interest rates, which will further ease out the cash outflow for house buying. Looking at the scenario of interest rates and property prices, it’s worth waiting at this moment. At the same time we should prepare ourselves from financial viewpoint so that whenever the opportunity comes we are able to seize it. There are four things that need to be considered to be prepared for your house purchase.1.Loan to value ratio:Most of the time people calculate the EMI on the full property value and feel that they can afford the EMI. For example, if the property price is Rs 50 lakh and the buyer has got a pre-approved loan offer @9.5%, then he feels that EMI of around Rs 47000 is within the acceptable range. But he misses the fact that he will not be getting loan on full value. As per RBI guidelines loan to value ratio in case of property of less than Rs 20 lakh is 90%, and above Rs 20 lakh is 80%. And this cost does not include any registration charges and other expenses. Thus, for Rs 50 lakh property, bank will fund for only up to Rs 40 lakh (80%), and the rest Rs 10 lakh has to be arranged by you.For those who are not financially prepared, this gives them the reason to withdraw other investments or search for personal or soft loans from friends and family. Many also ask money from parents, which may compromise their retirement corpus.So whatever property you have zeroed in on, do make sure that you have 20% of value of that property always available with you separately mapped for house buying goal.2.Other Related costs: House buying has many other costs attached to it. So 20% of value is not the only money which you have to arrange for. There is registration cost, stamp duty, brokerage fee etc. which as per one of RBI estimates comes up to around 15% (on upper side), of total house cost. This means that if house cost is Rs 50 lakh, the other related costs would turn out to be around Rs 7.50 lakh (@15%). RBI has suggested banks to include these charges too while considering the total loan to value in the case of house cost up to Rs 10 lakh, but for loan above this value the amount has to be arranged through self means. These costs can be deferred in case of under construction property, but the point is that you need to have a plan as to from where you will arrange for this. 3.CIBIL Score:This is another very important consideration which normally gets ignored. You won’t get any housing loan if your CIBIL Transunion Score is too low. CIBIL Score is 3 digit numeric summary of credit history. The score ranges between 300 and 900. Generally score of 750 and above is looked upon favorably by bankers.Now CIBIL score does not depend on your current income, your net worth or your capacity to repay the loan but it depends on your past behavior with other loans. It depicts your history as a borrower and thus your management of finances. Sometimes your score is low not because of your credit behavior but due to some operational mistakes at bank level. Now, though this thing can be rectified, it takes time - sometime months. And if the score is low due to your own mistakes then it sometimes takes years to improve.So if you are planning to take home loan in near term, do keep checking your credit score at regular intervals to avoid disappointments later. Even the pre- approved loans will not be disbursed if you have low score. 4.Cash flow and budgeting:Banks will ask for your salary slips, ITR and even your bank account statements to understand your cash flow. They would also look at your other loan repayments to figure out how much more EMI you are in a position to afford. Generally banks put 50% limit on your income for total EMI out go, which means that 50% of your income should be looked at from EMI perspective.Bank would tell you the maximum that you can get, but it is up to you to decide how much you can actually afford. Plan in such a way that you should be able to save towards your other important goals too. Many times it has been observed that while deciding onto purchase of the most desired thing, you overestimate your surplus and later on when you face the cash flow issues you end up taking more debt through credit card or personal loans etc. and get into a debt trap. It’s better to go for a 2BHK flat rather than 3 BHK, if that extra EMI burden would interfere in your basic lifestyle or other goal investments. Home loan itself is a long term commitment and to serve that you should be having a fair idea and plan behind it so you can have a balance among your different priorities. House purchase involves huge cost and if not planned properly it will hit your other goals very badly. Better to be patient and start planning for it, right away.Manikaran is a member of The Financial Planners’ Guild , India (FPGI). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.
