It won’t be wrong to claim most around us dream of owning a home. In fact, according to BankBazaar’s Aspiration Index 2019, a survey of over 1,800 salaried men and women across 12 cities, buying a house was the topmost life goal for all the participants.
However, to accomplish this dream, people at times take measures that put immense pressure on their personal finances. The question then arises: how far should you go to buy a home? Well, it should not be to the extent where you ruin your personal finances and jeopardise your financial goals.
Here we have discussed a few financial mistakes while buying a home that can put your finances at a big risk.
1. Using all your savings to buy a home
You save up usually to utilise the fund to meet different financial goals in the short and long term. It’s perfectly okay to use your savings while buying a home, especially for the down payment fund among other non-loan expenses like registration, interior decoration, etc. However, it might not be the best idea to disturb contingency savings like an emergency fund even for your down payment as doing so can put you in a risky situation.
2. Not checking different lenders to get a home loan
After months of research, you finally find a property at a great location that suits your budget. But in a rush to grab the deal, people often make the mistake of quickly settling for the first home loan that’s offered to them or not exploring any other option other than the one offered by their bank.
There are many banks and financial institutions which provide home loans, and it’s not necessary that your bank will have the best loan offer for you. What differentiates a good loan product from a bad one is its attractive rate of interest, low cost of borrowing, long loan tenure, low penalty rate, quick processing time, better prepayment rates and flexible loan eligibility norms.
If you rush to take a loan without checking the terms of the lenders and the quality of the loan product, it may cost you heavily in the long run causing severe damage to your financial health.
3. Buying a home that you can’t afford
Big houses are not always the better ones, at least from a financial perspective. As such, you’ll be well-advised to purchase a home which you can afford in the long-term without jeopardising your finances. Everyone wants to own a big house at a posh locality, but such houses cost a lot more too.
Homebuyers sometimes don’t look at their financial capabilities and buy a home which they can’t afford. Later on, they find it challenging to repay the EMIs and bear the associated charges such as maintenance fees. In such cases, usually, the buyer fails to repay the EMIs and end up losing the home apart from having a major financial setback.
It’s always better to focus on buying a home which you can afford according to your current repayment capacity while repaying the loan in long-term. In the long term, your income may increase, but so will your expenses. So, it is better to buy a home according to your existing repayment capacity. Try to use the extra savings (if any) in the future to repay the loan early.
4. Not keeping the down payment ready
When buying a home on loan, you will need to pay a down payment from own sources which may range around 10% to 25% of the value of the property. So, if you are buying a home valued at Rs 50 lakh, the down payment that needs to be arranged should be between Rs 5 lakh and Rs 12.5 lakh. Plus, there several other non-loan expenses that must be factored in depending, like registration, stamp duty and title deed charges, GST, brokerage, interior decoration, electrification, water supply, so on and so forth.
If you don’t keep the down payment and other funds ready, you might end up digging into your emergency fund or retirement fund or be forced to take a loan from friends and relatives.
The best practice is to make a detailed financial plan months before taking the plunge factoring in all the expenses without breaching your budget. You’ll be well-advised to invest in appropriate instruments to raise the fund in a timely manner.
5. Compromising other important financial goals
While buying a home is likely to be one of the most important financial goals for you, it doesn’t mean it’s the only goal that you need to meet. Many people buy a home and divert a major chunk of their income to repay their home loan EMIs. But later they struggle to arrange for funds for other crucial things like child’s higher education and retirement owing to which some of them either get depressed or end up borrowing money later. Worse, some are forced to sell their home at a distressed price to arrange for the money.
In conclusion, it’s critical to have a farsighted financial approach to ensure a major financial goal like buying a home doesn’t compromise other equally important goals. To strike the right balance, one needs to tick some essential boxes like through research and planning in advance, consistent smart investments to timely meet all your financial goals, and of course, tons of financial discipline. It’s best to avoid taking decisions that have major financial implications in a huff.
(The author is CEO, BankBazaar.com)