Times have changed! You don’t have to wait as long as your parents may have to purchase a house. Now at a young age with a decent salary and a little savings you can own your very own home. Investment in real estate is also a good investment which can bring you a steady income as well as tax savings if you finance your purchase. Also, real estate prices have a habit of increasing steadily over time and holding on to it for a limited period might give you a significant return.
|Follow our simple steps below to make sure everything goes right, after all, owning a home is often the largest single investment an individual or family will make.|
First things first, identify why you are buying a house:
For yourself and your family to live in
To rent it
Purely as a long-term investment
The importance of the various considerations below are dependent on which of the reasons above applies to you. We have highlighted the importance of each through a scale from¬†(not very important) -¬†(very important)
What is your budget?
Before you can start looking around in the market, its a good idea to know what your budget is and the first step is preparing it. Use our budgeting tool to prepare and analyse your budget.
When you have an idea of how much money you have available at the end of the month after your expenses, this is a good indication of what your monthly EMI could be. This is also a good time to review your budget. Maybe you see things you could cut to afford a bigger loan. Below are some important considerations for calculating the price you can afford:
- A good rule of thumb is that the EMI should not be more than 65% of your net income for a single person, and 40% for a married couple.
- A home should be a long term purchase and fulfil your needs for the next 6-8 years. Try to buy as much as you can afford comfortably. A price of 10-15 Lakh is a good first time purchase objective.
- Most banks will loan you up to 85% of the property value. The rest must come from you and your resources: personal savings or loans from parents, relatives, etc.Find out how much loan you can afford.
- In addition to the EMI, don’t forget all the expenses that will go along with your home purchase:
- Your initial contribution / down payment
- Financial institution’s fees
- Brokers fees, stamp duties, transfer charges
- Clubhouse membership, parking, society dues
- Furniture, appliances, interiors.
See if your bank loan will cover some of the above mentioned costs ‚ÄĒ some do.
While you are considering the above, remember that while your current home purchase may not be your dream home, you are establishing a base of investment. You will only move up from here.
Deciding on the property¬
- distance from your work, or other commercial areas/business districts
- locations of good schools in the area
- public transport options from the location
- markets for grocery and other essentials
- hospitals and medical facilities
- reputation of the builder and availability of water, electricity and sewage facilities
- traffic, pollution situation, security, and parking options
- public or commercial construction or development projects in the area
- the chain of title, maintenance of the property, possible water leakage problems, and society transfer charges
So now you’ve narrowed down on the house you want to buy which is comfortable within your budget. Now you need to finance it. Below are some considerations.
Banks and other lending institutions look at some factors to arrive at your eligibility for a home loan. The common factors are:
- Educational background
- Industry in which employed
- Other loans availed
The eligibility determines the amount of the loan, the interest rate you are charged, the term for which the loan may be taken, the initial contribution expected from you etc. Some products assume a certain level of salary increases every year and arrive at a higher eligibility. It could mean you can borrow an amount higher by up to 30%. A loan taken jointly with a spouse will increase the amount you can borrow as both incomes are taken into account. You could also choose a longer repayment plan to reduce the monthly EMI if necessary.
If you anticipate increasing your salary as the years go by, a step-up loan is a great idea. You will make lower repayments in the initial years and higher ones as your income increases. This is available to certain professionally qualified persons.
Be sure to compare loans carefully and make sure the rates compared are of the same type. You can always ask bankers that work with your family if they will give any preferential rate. Be sure to shop around and keep your options open in case things change.
Always negotiate on a loan rate. The rate shown in advertisements and on websites may not be the best they can do. Ask banks for their best offer to get your business. Check on how much loan each institution is willing to give you. Not all lenders will extend the same amount to you for a given property. Choose fixed or floating rate, depending on your anticipation of the market. If you expect rates to go up, lock in at a fixed low rate. If you expect rates will decrease, go with a floating rate. Of course no one really knows but take your best guess!
Tax breaks make a difference
If the principal component on your home loan is Rs. 1 lakh and you have no other investments; you will reap full advantage of the benefit. It is possible to obtain a double benefit; deduction of up to Rs. 1 lakh on the principal and Rs. 1.5 lakh on the interest.
Use our tax calculator and find out more.
In deciding how aggressively you want to payback your loan, use our EMI calculator to see what your payments might look like. Try choosing a longer term to get smaller EMIs or a shorter term for higher EMIs and a quicker payback on your home.
Before paying the loan processing fee, make sure to have the lender check your property so you don’t end up paying for nothing. And immediate disbursement gets the best rates so take your loan when you are close to finalizing on your property.
Now that you’ve bought your dream home or made the perfect investment, don’t neglect insurance for your new property.
- You may want to purchase Home Loan insurance which will cover the EMIs in case you meet with an accident, job loss, or similar fate which leaves you unable to make the payments. Without insurance or other resources, you could find your home repossessed by the bank with nothing left for you to show for all the payments you already made.
- Once you are living in the home you will need homeowners insurance to protect against fire, theft, earthquake and the like.
Whatever methods you opt for, you will be happy to own your own home and make an important addition to your investment portfolio!
Have more questions about planning your home purchase? InvestmentYogi’s experts are here to help. Prepare your personalized financial plan taking your unique financial situation and goals in mind. Apply NOW!