How to save money for buying your dream home

Published: June 28, 2019 10:39:50 AM

If you are looking to buy a home at some point in your life, start saving at the earliest. Here's how you can plan it.

home buying, dream home, home buying tips, how to buy a house, saving money to buy a house, home loan If you decide on taking a loan, you must estimate the amount of loan you can comfortably take so as to comfortably pay off your EMIs

One of the most common financial goals that people aspire to achieve is living in their own home. Buying your own home is a privilege many have to strive hard for. Planning for it, itself can be a daunting task. One needs to understand one’s cash flow and requirement to adequately finance this goal.

Firstly, you must decide when you’d like to buy a house. It’s important to start planning as early as possible. If you start planning at the age of, say, 25, you would be able to save enough to buy a house in the next 7-10 years.

Ideally, you must choose to invest your money in instruments that will yield a higher rate of return than the current rate of inflation. For example, if you are planning to buy a house in the next 7 -8 years or more, you must invest in equity funds rather than debt-based instruments. This will help you yield higher returns and build a larger corpus over the years, with the benefit of compounding. Of course, home loan eases some load off your shoulders. But, you need to plan for the down payment of the house, which again is quite a substantial amount. Moreover, usually the maximum loan one can avail is up to 80% of the value of the property, i.e., you would need to plan for the remaining 20%.

Let look at an example. Mr. Sanjay is 26-year old and wishes to buy a house in the next 10 years. Let’s assume the cost of the house (as of today) is Rs 1 crore. Considering inflation of 7% p.a., the same house would cost around Rs 1.97 crore in 2029. If he avails a maximum loan of 80%, he would have to start planning to fund the remaining 20%, i.e., approx. Rs 39 lakh. To meet this goal, he needs to save and invest Rs 17,000 every month (considering a 12% p.a. return). The idea is to start saving as much as possible and start as early as possible. You may start with a small SIP, but increase it by 10%-20% every year. This will easily help you reach your desired corpus over the years.

Secondly, if you decide on taking a loan, you must estimate the amount of loan you can comfortably take so as to comfortably pay off your EMIs. Banks usually charge interest of approx. 8.5% – 9.5% p.a. Ideally, take a higher loan over the long run, simply because the rate of return on your investments would be higher than the interest you are paying to the bank.

Additionally, we have observed that when people are looking to buy a house, if they stayed clear from these common financial mistakes, they successfully go on to planning, investing and moving into their dream home.

Here’s what they need to do:

# Avoid buying a house when you are in debt

When you are already in debt, you are not saving as much as you can to meet your goals of buying a new home. Adding a home loan to the mix further weighs down your monthly budget. It is advisable to pay off your debt before you take on another loan.

# Avoid buying a house you cannot afford

Buying a house is not your life’s only financial goal. So, it isn’t advisable to spend all your money on just one goal. Adopt a realistic approach and fit a home within the perfect budget and not a budget into your perfect home.

# Avoid not saving enough for a down payment

Many homebuyers don’t give the down payment much importance and therefore do not save enough for it. But what they do not realize is, that not only does this increase the EMI burden, but they’ll end up paying more as interest and fees too. It is advisable to pay a minimum of 20% of the property value to avoid this expensive error in judgment.

# Remember to incorporate costs related to moving homes

Other costs, such as legal fees, broker fees, property taxes, insurance, moving expenses, etc., should be accounted for when you are saving up for your new home. Planning ahead helps you avoid dipping into your emergency fund to meet these expenses.

As with any financial goal, if you are looking to buy a home at some point in your life, start saving at the earliest. With the right advice from a financial expert and setting realistic expectations for your savings, expenses and your new home, you can be a proud homeowner without the financial burden.

(By Amar Pandit, CFA and Founder, Happyness Factory)

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