Sovan Mandal, vice-president, products and program, IMGC
Aspirational India has witnessed a profound change in recent times. One of the youngest countries in the world is on the crux of change.
Each individual in today’s world aspires to own the house that will be his home. Living in one’s own home gives immense financial security to most people. As exciting a proposition, it is to own the house that one is living in, the path leading to it is fraught with challenges. A financial decision of such significance is bound to entail a lot of anxiety. The anxieties related to the purchase of a home can be mitigated to a large extent if one plans well in advance.
The changing economic and environmental factors we see today have helped boost the aspirations of the growing consumer base. Today purchasing a home is looked at as not only a necessity but also a smart investment. Over the course of one’s life, we observe that the reasons to make such an investment varies. Buying a home climbs up your priority list depending on which stage of your life you are in. However, one needs to perhaps re-look at approaching home ownership goals.
In all the stages, an important decision one would need to make is to evaluate between buying an under construction house versus a ready-to-move house, that will be your future home, need a different approach to financial planning. All the factors must be weighed in before making your final decision. In an under construction purchase you can defer your expenses over a 36-48 month period as the builders link the payment terms to the completion stage of the construction. In today’s market builders have launched several innovative construction linked schemes in partnerships with banks – one needs to closely evaluate these schemes as they provide far greater financial flexibility. Some of the associated costs of home buying, which we talk in detail later also gets deferred by 36-48 months at the time of handover. However, one needs to bear in mind, that while buying an under construction property may give greater financial flexibility, the risk of delayed completion or non-completion of the property by the builder, is always there. Moreover, one has to bear the burden of paying a rent for one’s accommodation, while the under construction property is still getting ready for moving in.
In a ready to move property you immediately start saving on the rent and there is no uncertainty of a project delay by the builder. However, this implies incurring a fairly high expense to be made upfront – the down payment, the immediate monthly instalments and other associated costs of home buying. This your financial liabilities start immediately.
In some of the developed markets, the monthly instalments for repayment of loan are more or less similar to the monthly rentals, as they have low interest rates, longer tenure loans and higher rentals. In India, the monthly instalment for loan repayment is substantially higher than the monthly rental for the same property. This is one major consideration that one needs to factor in the financial planning.
Home purchase is such a high value transaction, sometimes involving whole life savings, it’s important to understand all means which provides additional cost savings. Government provides tax benefits to home buyers; do understand the tax savings on principal and interest amounts. Taking the property in your spouse name or jointly could also lead to some additional savings, the government gives additional tax benefits to women borrowers, most states have lower registration cost for women or joint ownership. These days’ banks also are giving lower interest rate to women applicants. It is important to understand all these finer details from your tax / financial advisor and build them in your plan.
Banks look at your current income and other obligations (other monthly outflows) before deciding on your loan amount. As home loans are at the cheapest rate of interest amongst all other consumer loans and also provide tax benefits, it is financially beneficial to foreclose all other loans and maximise your home loan. With no repayment charges for variable rate home loans it is definitely not a bad idea to keep additional cash in hand during the purchase of the home. The extra cushion helps in better planning.
A home purchase is in fact an emotional process – one always ends up liking / buying something which stretches the original budget a bit. As you stabilise your cash flows post the purchase, you can always consider prepaying your loan. Banks are giving innovative products for both self-employed and salaried customers to maximise the home loan amount. Even if you have to pay a small fee for additional loan amount, it would wise to avail the same.
Different life stages are dictated by different needs to purchase a home, which in turn necessitates keeping a range of factors in mind. However, the once common factor that binds all the three stages is of course the fact that a house is an emotional and financial asset, which you create to secure your and your family’s future. To realise this dream, prudent financial planning is a must to relieve yourself of the unnecessary anxieties and make the most of your savings.
Happy Planning. Start Today.