Owning a home gives you a sense of pride and liberty, but also many responsibilities. For a first timer, it would be a rather complicated process, especially ‘saving’ for down payments. The savings for a home purchase can be started at any time, much before you seriously start shopping for a home. With the RBI increasing the down payment limit to 20% of the actual price of the property for loans above Rs.20L, an early start in saving for your downpayment is the best option.
Planning is the most important step for buying your first home as in with any other purchase. And here, the key for planning is an honest financial self-appraisal with a budget planner. The idea of budgeting may be distasteful to those who have not tried it. However, budgeting is a fabulous diagnostic instrument to analyse your income-expenditure patterns and thereby your true financial position. It helps you to identify and eliminate discretionary expenses.
House ownership typically involves multiple costs like down payments, loan repayments, property taxes, insurance, maintenance, interior designing, stamp duty, etc. So, if you don’t fix your overspending before you buy a home, you will not be able to protect yourself from the cash flow problems which may affect you.
Also, tracking your income and expense patterns will give a realistic picture of what you can afford to repay each month, considering your other living expenses. Once you understand exactly what you can borrow, start looking out for a home like a shrewd shopper.
Aim for a home you can really afford to pay. Loans can be good friends in the hour of need but an inconvienient burden, if not properly managed. It is wise to restrict your monthly loan repayments to 40-45% of your monthly income. Real estate values are always on increasing trend, except for a few mid term hiccups. So, even if you buy a small house now, in a year or two the prices will double, especially if you live in the city giving you the option of liquidating it and opting for a better residence.
Banks will finance upto 80% of the property value. So, the remaining 20% are expected to be shelled out of your pockets. If your savings allows, it is always better to make the maximum down payment possible, to reduce your monthly financial burden in the form of an EMI.
Familiarize yourself with available options
It is crucial to find the right lender and the right loan in the process of buying a home. It is always good to know the basics of loan terms and clauses from your friends or through online sources, before you speak to the lender.
Compare the EMI payable for different tenures with your monthly income. Higher the loan tenure, lesser the EMI, but at the same time you will be shelling out more interest. There are also schemes like step up loans, where EMIs accelerate every year in proportion to the increase in your income, however it comes with a certain amount of risk. Banks even allow the customers to switch the current EMI options to longer loan tenures, if they are unable to take it forward.
Banks sanction in-principle loan based on the customer’s eligibility for those who have not yet decided on the property. This helps home buyers guage the loan amount that a bank would be able to give them and the the money they will have to manage. This will help set a budget limit before looking out.
Few saving tips
- Those who started planning early can slowly save and invest in good investment schemes. But you need to make sure that your savings are working for you. Money that is put in a savings account earns less and will not help you much to reach your goal faster. Look forward for a high-yield savings or low risk investment in debt funds. Investing in share markets is a good option, but not a guaranteed one. However if you stay invested for a long term and make your exit at the right moment, it will immensely help you in meeting your money requirements.
- Those who save late also have many options like gathering additional sources like tax refunds, bonuses, dividends etc. Immediate money requirements can be arranged from sources like- gold loan, personal loan, borrowing from relatives, collateral security etc.
- If you are selling your current home for a new one, do it right when the real estate market is up. Or if you have already done it, invest the money in low risk investments which have a flexible liquidity option.
- If you are servicing multiple loans, if possible clear the costlier loans or try to pay off most of them. Personal loans, credit card debts and business loans are costlier, while home loan is the cheapest among them and the tax advantages on home loans is an additional benefit. You can also make part prepayments for all loans whenever you have excess money which will directly bring down your outstanding prinicipal amount.
- Individuals often take personal loans to bridge the immediate finance requirements. The average interest rate of a personal loan is 16-30%. Ideally you should go for other loans such as loans against property, collateral security loans, top up loans, loans against fixed deposits, gold loan, with lower interest rates for immediate requirement of funds.
- Always say a strong ‘no’ to borrowing on credit cards. Always pay off all your credit card dues on or before the due dates, as it is the most difficult one to break off if debts mount.
- While planning, consider not only your current position but also the future changes that could impact your situation like changes to your income, expected costs etc.
Once you begin to understand all the parts of the home buying journey, you’ll feel confident. No matter how a home buyer accumulates funds to purchase a home, careful planning will always make the road to home ownership smooth.