If you think the first critical step while planning to buy a house is to start researching properties, you might be wrong.
Buying a house is possibly the biggest financial task of our lifetimes. It often requires years of planning and research, and another 10-30 years to clear the home loan dues. The stakes couldn’t be any higher when a major portion of our lives (and that of our family members) is defined by this humongous financial commitment.
But if you think the first critical step while planning to buy a house is to start researching properties, you might be wrong. For example, if you are sure about buying a 3 BHK apartment in a prominent locality of a metro city but you haven’t paid much attention in finding out whether you’d be able to afford it, you might actually not be able to buy it, or even if you do, the financial burden could hurt your other critical goals. The first step instead should be to set a realistic budget for the house which is smartly aligned with your financial capabilities and home requirements.
In fact, once you have a budget, it gets much easier to filter properties that meet your other important requirements like type, size and location of the property and determine the timing of the purchase. On the contrary, overlooking this super-critical consideration could have adverse financial and emotional ramifications.
So, how should you go about setting a realistic budget for your home? What are the key things you must factor in? Here are a few pointers which you’re likely to find very useful.
If you’re planning to take a home loan, you might be aware that if you have a stable income and a good credit score (usually over 750-800), you may be eligible for the best loan offers. However, your lender will never finance 100% of your home buying budget. With low-value loans, the lender may finance up to 90% of your costs. However, in most cases, especially in high-value loans, you may only get financing up to 75-80% of your budget. In either case, the remaining 10-25% shall be paid as a down payment.
A home purchase also involves additional costs such as GST, registration, stamp duty, brokerage, furnishing etc. Your lender is likely to cover GST but not the rest. In all, these additional costs may be anywhere between 10% and 30% of the base price of the home you’re buying. So, if your chosen property costs Rs 50 lakh, your additional costs may be another Rs 5 to Rs 15 lakh. Therefore, would you be able to provide the margin money? If not, how long would it take to arrange that? Also, won’t the property costs appreciate by the time you’re ready? The answers to such questions can give you critical insights while setting the budget for your home.
Access to external funds
Do you have access to any external funds like financial assistance from your parents, inheritance or investment returns? Such external funds could be of great help in reducing the margin money requirements or expanding your budget for a home. Factoring them in will also help you while setting a realistic budget for your home.
This is one of the most important considerations as this would help in determining the affordability of a long-term financial commitment. Now, you might not be entirely wrong to assume that since your household income will increase in the future, an EMI amount which looks rather steep today might be manageable a few years later. However, you must also understand that as your income increases, so do your expenses. Plus, there’s inflation and other repayment obligations. So, you must reach a budget after taking a balanced view. It’s a thumb rule to limit your combined debt obligations to 40% of your current household income.
For example, a Rs 40-lakh loan (for a Rs 50-lakh property) at 7% p.a. for 20 years would have an EMI of Rs 31,012. If you also have a car loan EMI of Rs 10,000, your total debt obligation would stand at Rs 41,012. Now, this would ideally be okay if your current household income is above Rs 1.02 lakh per month. Do note that household income would include the income of all the members of your family and not just necessarily your income. Also, note your home loan EMIs would be higher if you go for a shorter loan tenure or a higher loan amount or get a higher interest rate. Carefully evaluate these things before finalising a budget.
Existing housing expenses
If you’re planning to buy an under-construction property for self-use, you must realise you are likely to pay the rent of your existing house in addition to the loan EMIs until you get possession of your property. This could be a substantial burden. To avoid this, you might want to go for a ready-to-move-in property but then that could be more expensive than an under-construction one. You must consider these factors while setting your budget.
Other critical financial goals
Lastly, you must ensure while setting a budget that your home-related expenses don’t undermine other critical financial goals like raising a fund for your kid’s higher education or building an adequate retirement fund. An ideal budget should leave ample room for you to meet these equally important targets.
In conclusion, smartly setting a realistic budget would hold you in good stead if you’re planning to buy a home in the near future to benefit from the prevailing record-low home loan interest rates. Once you have clarity, you can then make necessary adjustments while looking for properties like buying a house on the city outskirts instead of the city centre or going for a smaller house to stay in your budget.
(The writer is CEO, BankBazaar.com)