Plan Before you Buy A House
Buying a house is different from buying a shirt; you cannot do it impulsively just because you like the color or are bored of the old ones (unless you are millionaire). Buying a house usually requires careful planning; ideally the planning should start at least two to three years in advance. So how do you plan to buy a home? Planning for buying a house does not involve only saving money, which of course is essential but involves other aspects too.
Plan the finances
The first step to a successful plan to buy a home is planning your finances. Generally buying a house involves taking a loan, banks usually approve up to 80% of the total property value so the balance 20% needs to come from your savings.
When you save, keep in mind the fact that property rates will go up with time. Apart from the down payment there will also be a monthly outflow of the loan installment.
John wants to buy a house in two years time and he wants to start planning for it. The house he wants to buy today costs around Rs. 35 lakhs. Assuming a 15% rise in the value of property per year the cost of the flat would be around 47 lakhs after two years.
So he needs to plan for a payment burden of Rs. 35,665 (20 years loan at 9.75%) per month to pay for the housing loan.
- He pays a monthly rent of Rs. 12,000
- He has a car loan for which he pays an EMI of Rs. 6500. He still has to pay 18 installments of the loan.
- His current savings are around six lakhs.
- He puts around Rs 4,000 each month in a recurring deposit
- He also saves almost Rs 30,000-50,000 additionally annually when he gets his yearly bonus.
In 2 years, the car is already paid for and there is no need to pay rent – since he is buying a house. The car EMI and the saved rent can take care of Rs. 18,500; the rest of money Rs 17,665 (Rs. 35,665 – Rs. 18,500) he plans to cover with other savings, salary and pay rise he gets annually (at least 10%).
How to pay for the down payment?
John has Rs 6 lakhs in savings now. But he needs Rs 9.4 lakhs for down payment – which means a differential of 3.4 lakhs.
|Current Scenario||In 2 years|
|Akash has Rs 6 lakhs in savings now. This earns around 8% interest annually||After two years compounded annually it would amount to about Rs. 7 lakhs (Rs. 699,840)|
|Recurring deposit of 4000 each month for 2 years||This amounts to Rs. 1 (Rs. 1,05,468) lakhs at 9% after two years|
|Savings each year Rs. 40,000 for the next two years from his bonus.||This would be around Rs. 90,000 at the end of two years (at 9%)|
Going by the current trend he would have around 8.9 lakhs as against the 9.4 lakhs he needs. For the Rs. 50,000 differential he could:
a) Withdraw money from his PF (PF withdrawals are allowed in case of buying immovable property)
b) He could increase the monthly deposit to Rs. 6000 which amount to Rs. 1.5 lakhs at the end of two years.
c) Instead of a recurring deposit, he could invest in an equity diversified mutual fund SIP which gives better returns around 11-12%
Have a game-plan
Having taken care of the financial aspect let us look at other things that need to be planned in advance. Here are some useful tips if you plan to buy a home in the near future.
Keep you bank statements clean
Any bank before approving a loan goes through you past bank statements. So you should make sure that there are no bounced cheques, no charges for non maintenance of balance etc.
Reduce your financial burden
Avoid making any huge financial commitments before you buy a house like buying a car or taking an expensive holiday etc. In case you already have a loan try and repay it before you make another commitment. John plans to commence his new loan a good six months after his car loan ends.
Pay your taxes on time
Banks look at the returns of past three years before they approve the loan.
Stability in professional life
Do not switch jobs recklessly. A loan is a huge liability so you should have a stable job; this also helps when the bank makes a reference check at your work place.
Take a pre-approval for the loan
Usually banks allow a window of up to six months for you to finalize a property after the loan is approved.
A pre approval takes care of two things:
a) you are sure of your credit worthiness and know if you will get the required loan;
b) it will help you save time and in case you get a good deal; you will be able avail it without wasting time in getting a loan approved.