How To Buy Your Dream
Home At a Young
Age
Gone are the days of the unwritten rule that you can start planning to purchase your home only after you are “settled” in life (read you’re married and have kids). Countless youth are now seeing merit in the proposal that it is better to start early when it comes to possibly the biggest investment of their lives. Then there are those who want to buy a small house quickly as a pure investment move.
And there are some advantages to buying a house quickly: Either you make a large part of your working life free from the crisis of rent, or the house continues to provide excellent returns as a commendable asset. If you plan to rent it, you can make it a great source of additional income (and reduce your loan EMI burden). That being said, if you are planning to buy a home at a young age then you will have to tick some important box. Here are some tips that you might find useful.
Be financially disciplined to make a down-payment
Financial discipline is the cornerstone of making this dream sustainable. You will have to pay a down payment from your pocket at home. This can be anywhere in the range 10% to 25% of the market value of the property. If the price of a 2 BHK apartment is around Rs 60 lakhs, then the down-payment will be between Rs 6 lakhs to Rs 15 lakhs.
To create your down-payment fund, start cutting costs, avoid extravagance, pay off your debts and try to expand your income pool. Let us discuss some important points in this context:
Stick to your budget
Where does the majority of your monthly income go? On rent, groceries, eating out, shopping, entertainment? Start analyzing it. Classify your expenses and determine how you are spending your money and then make a budget. In this digital age, you do not need to do anything manually. Many apps exist to help you to set a budget. You can compare your income to expenses and track how you spend your money.
This can help you cut wasteful expenses and save for your down-payment. You don’t have to cut your lifestyle expenses completely, just trim them. For example, if you are currently eating outside food 10 times a month, then reduce it to 5 or 6 and save some money. IN Similarly, instead of buying branded groceries for cooking at home, consider switching to house brand or generic which may be cheaper. The same goes for skipping expensive gym subscriptions for working out of home, taking public transportation to work (or even taking a bicycle, if possible), etc.
Research on Your Dream Home
We all dream of owning a house, but do you have the details? Are you looking to buy an apartment, an independent house, a condo? How many bedrooms do you want? What facilities are you willing to pay for – car parking, swimming pool, club house? Where will it be located – in the center or outskirts of the city?
The cost of owning a house varies based on all (and more) factors mentioned above. For example, a single square footage in a house on the outskirts costs less than one in the city.
Knowing these details means that you will know how much to save. However, it is important to set a budget that suits your current repayment capacity. Many times many people go for a house that they cannot really afford, and later struggle with EMI.
Do not just save invest
Just keeping your extra income separate in a savings account may not give you enough returns. Consider investing it. Let us compare some options for a clear understanding. A savings account will earn you a maximum interest of 4% per annum. A fixed deposit (FD) account will earn you interest from 6% per year before tax. A Recurring Deposit (RD) account will earn you interest starting at 7% – 8% per year before tax. Conversely, some mutual funds may offer between 10% and 15% (or even more) depending on the investment fund.
FD and RD are risk-free, i.e. they are not affected by market fluctuations. Yes, mutual funds are risky and dependent on market conditions, but they have the potential to outperform inflation in the long run. This can be a big advantage because you are saving today for tomorrow’s house. Due to inflation, the cost of the same house will be higher tomorrow. So, high risk = high reward. Also, the younger you are usually, the more risk you can afford due to your low financial commitments.
Set aside money for future EMI
Buying a home without a home loan seems impossible today. And home loans do not come cheap. You will have to pay EMI every month, and it is likely to be much higher than the rent you are currently paying. Therefore, use an online EMI calculator to determine how much you may need to set aside each month to repay your home loan.
Once you have a clear figure, it may be a good idea to start channelizing your savings and investment returns so that you can set aside such an amount every month before you actually start paying your EMI. This will be a good rehearsal for how you will deal with your finances when the EMI actually begins.
Be Prepare for other expenses
In addition to down-payment, other out-of-pocket costs are included. For example, stamp duty (from 5% to 7% of the property value), registration cost (at least 1%), memorandum of title deed fee (0.1% of the loan amount), interior decoration, electricity connection, water supply , so on and so forth.
There are also brokerage fees, legal fees, home insurance etc. While it can be difficult to accurately factor in all non-debt charges, try to make at least one estimate, and strategize accordingly (your EMI savings, which are discussed in the last point, will be very helpful).
Improve your credit score
A good credit score (above 750) not only makes you eligible for a home loan, but also increases your negotiating power for lower interest rates. Due to the long term of a home loan, you pay a lot more in the form of interest – much more than the principal amount, actually.
Therefore, if your credit score is good, you may get a lower interest rate. By promptly paying off your entire balance, do not apply for too many credit products within a short period, not using more than 30% of your credit card limit, and fixing credit report errors, if any, on your credit improve the score.
Compare Home Loans
In addition to research the type of home you want to buy, also compare home loans on third-party websites to narrow down your options. Interest rates start at 8% + per year. And if you choose a floating rate loan, it is usually linked to the bank’s MCLR (Marginal Cost of Funds based lending rate). Fixed interest rates start at 9% + per year.
Also consider other aspects such as processing fees (0.25% to 1% of the loan amount), pre-closure fees (up to 5% on fixed-rate loans), and late payment fees. Comparing all aspects of the home loan package will give you information about the actual cost of borrowing.
Why is now a good time to buy a house
Floating rates are linked to the bank’s MCLR. The MCLR is dynamic and changes together with prevailing macroeconomic conditions. The repo rate of the Reserve Bank of India (RBI), which is the policy rate that affects all loan and deposit rates in India, also affects the MCLR. An increase in the repo rate can lead to an increase in the MCLR, which may increase the interest rate of home loans.
In August 2019, the central bank cut the repo rate by 35 basis points, the fourth consecutive cut. It has started lowering the MCLR of some banks, leading to lower home loan interest rates. Therefore, if you apply for a home loan today, it is likely that it will be cheaper than it was a few months ago.
There are also tax benefits...
Home loan repayments enjoy tax deductions. Under Section 24 of the Income Tax Act, you can claim up to Rs 2 lakhs per financial year on the interest paid on your home loan. And under Section 80C, you can claim up to Rs 1.5 lakhs per financial year on the principal repaid.
Buying a home is not an easy task, but delaying the plan may not be profitable either. Yes, your income will increase in the future, but more financial commitments will also result in your expenses. So, stay informed, and learnt to manage your money well. You may also have to make some sacrifices, but it will all pay off when you get those coveted keys!