Gone are the days of the unwritten rule that you can start planning your home purchase only after you are "settled" in life (read you're married and have kids). Countless youngsters are now seeing merit in the proposition that it's better to start early when it comes to possibly the biggest investment of their lifetimes. Then there are those who want to buy a small house quickly as a pure investment move.
In fact, according to BankBazaar's Aspiration Index 2019, a unique survey of over 1,800 salaried men and women across 12 Indian cities, buying a home overwhelmingly tops the list of important life goals.
And buying a home early has certain advantages: you either get to spend a major part of your working life free of rent woes, or the house continues to provide great returns as an appreciating asset. You can also make it a great source of additional income (and bring down your loan EMI burden) if you plan to rent it out. That being said, you need to tick certain important boxes if you're planning to buy a house at a young age. Here are a few tips that you'll find useful.
1. Be Financially Disciplined to Build Down-Payment
Financial discipline is the cornerstone to making this dream affordable. You need to pay the down-payment on a house from your own pocket. This can be anywhere between 10% and 25% of the property's market value. If a 2BHK apartment costs around Rs 60 lakh, then the down-payment will be between Rs 6 lakh and Rs 15 lakh.
To build your down-payment fund, start cost-cutting, avoid wasteful spends, clear your debts and may be try to expand your income pool. Let's discuss a few important pointers in this context:
2. Stick to Your Budget
Where does most of your monthly income go? On rent, groceries, dining out, shopping, entertainment? Start analysing this. Categorise your expenses and determine how you're spending your money and then make a budget. In this digital age, you don't have to do anything manually. There are many apps out there to help you set a budget. You can compare your income to expenses and track how you spend your money.
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This can help you cut down on frivolous expenses and save for your down-payment. You don't have to cut off your lifestyle expenses completely, just trim them. For example, if you're currently eating out 10 times a month, cut it down to 5 or 6 and save some money. Similarly, instead of buying 'branded' groceries for cooking at home, consider switching to 'house brands' or generic ones that may come cheaper. The same goes for skipping expensive gym subscriptions to work out from home, taking public transport (or even a bicycle, if that's feasible) to work, so on and so forth.
3. Research on Your Dream Home
We all dream of owning a home, but do you have the details sorted? Are you looking to buy an apartment, an independent house, a condo? How many bedrooms do you want? What amenities are you willing to pay for-car parking, swimming pool, club house? Where will it be situated-in the heart of the city or on the outskirts?
The cost of owning a house varies based on all (and more) factors mentioned above. For instance, a house in the outskirts costs way less than one in the city for the same square footage. Knowing these details means you'll know exactly how much to save. However, it's crucial to set a budget that's in line with your current repayment capacity. At times many go for a house that they can't really afford, and struggle with the EMIs later.
4. Don't Just Save-Invest
Simply setting aside your excess income in a savings account may not fetch you enough returns. Consider investing it. Let's compare a few options for clearer understanding.
A savings account will earn you a maximum interest of 4% p.a. A fixed deposit (FD) account will earn you interest starting from 6% p.a before tax. A recurring deposit (RD) account will earn you interest starting from 7%-8% p.a before tax. In contrast, some mutual fund investments can offer between 10% and 15% (or even more), depending on the fund.
FDs and RDs are risk-free, i.e. they are not affected by market fluctuations. Yes, mutual funds are risky and depend on market conditions, but they have the potential to beat inflation in the long run. This can be a great advantage because you're saving today for a house tomorrow. The same house will cost more tomorrow thanks to inflation. So, higher risk = higher reward. Also, usually the younger you are, the more risk you can take owing to your fewer financial commitments.
5. And Set Aside the Money for Future EMIs
Buying a home without a home loan seems impossible today. And home loans don't come cheap. You'll have to pay EMIs every month, and that's likely to be way more than the rent you're paying currently. So, use an online EMI calculator to determine how much you may need to set aside each month for your home loan repayment. Once you've a clear figure, it might be a good idea to start channelizing your savings and investment returns to set aside that much amount every month even before you actually start repaying your EMIs. This will be a good rehearsal of how you'll deal with your finances when the EMIs actually begin.
6. Prepare for Other Expenses
Apart from the down-payment, there are other out-of-pocket costs involved. For instance, stamp duty (from 5% to 7% of the property value), registration cost (at least 1%), memorandum of title deed charges (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. too. While it might be difficult to accurately factor in all the non-loan charges, try to have at least an estimate, and strategize accordingly (your EMI savings, discussed in the last point, will be of great help).
7. 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. Because of the long tenure of home loans, you actually end up paying a lot more as interest-way more than the principal amount, in fact. For example, if you borrow Rs 60 lakh for 30 years at 8.7% p.a., you'll end up repaying Rs 1.09 crore in interest charges. But if you were charged a higher interest rate due to a poor credit score, you may end up paying much more. For example, the same loan given to you at a rate of 10.5% will lead to a total interest of Rs 1.97 crore over 30 years.
So, if you have a good credit score, you could get a lower interest rate. Improve your credit score by promptly paying your outstanding dues in full, not applying for too many credit products within a shrt period, not utilising more than 30% of your credit card limit and correcting credit report errors, if any.
8. Compare Home Loans
Apart from researching on the type of home you wish to buy, also compare home loans on third-party websites to narrow down your options. Interest rates start from 8%+ p.a. and are usually pegged to the bank's MCLR (Marginal Cost of Funds Based Lending Rate) if you choose a floating rate loan. Fixed interest rates start from 9%+ p.a.
Also consider other aspects such as processing fees (0.25% to 1% of the loan amount), pre-closure charges (up to 5% on fixed-rate loans), and late payment fees. Comparing all the aspects of a home loan package will give you insight into the actual cost of borrowing.
9. Why Now Is a Good Time to Buy a House
Floating rates are pegged to the bank's MCLR. The MCLR is dynamic and changes in tandem with prevalent macroeconomic conditions. The Reserve Bank of India's (RBI) Repo Rate, which is the policy rate that influences all loan and deposit rates in India, also influences the MCLR. A hike in the Repo Rate may lead to a hike in the MCLR, thereby increasing the interest rate of the home loan.
In August 2019, the central bank slashed the repo rate by 35 basis points, the fourth rate cut in a row. This has started to bring down the some banks' MCLR, thereby reducing home loan interest rates. So, if you apply for a home loan today, chances are it will be cheaper than what it was a few months ago.
10. There Are Tax Benefits As Well...
Home loan repayments enjoy tax deductions. Under Section 24 of the Income Tax Act, you can claim up to Rs 2 lakh per financial year on the interest paid on your home loan. And under Section 80C, you can claim up to Rs 1.5 lakh per financial year on the principal repaid.
Buying a home isn't an easy task, but delaying the plan may not be profitable either. Yes, your income will increase in future, but so will your expenses owing to more financial commitments. So, be informed, and learn to manage your money well. You might have to make certain sacrifices too, but then it will all pay off when you get those coveted keys!
(The author is CEO, BankBazaar.com)