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Buying A Dream Home? Ensure You Don't Ruin Your Financial Wellbeing - Outside View by PersonalFN

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Buying A Dream Home? Ensure You Don't Ruin Your Financial Wellbeing
Sep 29, 2017

Home is where your heart is ☺

Buying a house is as much an emotional decision as it is a financial one. And owning it is both a matter of pride as well as a necessity. As the common adage goes - "to have a roof over one's head" compels one to buy a house as a security. With the rising trend of nuclear families, youngsters are under tremendous pressure to purchase a house. Real estate market players, too, have a knack of playing around with a buyer's emotions. They do not miss any possible opportunity to do so. Moreover, with soaring property prices, most home buyers have to opt for a home loan.

You see, buying a real estate property - especially a house - is the foremost requirement of most individuals. While many of us want to buy a house to live in, some may want to buy it as a good investment. So, there are different needs.

However, stretching your budget to buy a real estate property can have big impact on your other financial goals too. Skyrocketing prices is impeding the affordability and is the biggest issue. Today buying a house especially in a metropolitan city like Mumbai or Delhi requires huge capital investment. While home loan schemes are available in plenty, affordability yet remains an issue. You see, as with other asset classes you can't invest small amount every month to buy a real estate property.

At times to fulfil this vital financial goal (of buying a house), a home loan is availed -- to a degree that many stretch beyond their means. Hence, always bear in mind though buying a house is important for you do not let this purchase decision affect other important goals of your life.

Financing your home...

Lenders / banks decide how much home loan you are eligible for based on factors such as your income, repayment capacity, age, continuity of occupation, number of dependents, existing assets and liabilities, savings history and credit history, etc.

Even though you fit the eligibility criteria based on your gross monthly salary, the lenders may limit the loan amount to 80% - 90% of the value of the home you want to purchase. And considering the other Stamp duty and registration charges you need to bear, you should have at least 20% - 25% of the house value to put up as a down payment and statutory expenses.

While you can still manage to arrange for this huge chunk, let us look at the options to avoid while arranging your down payment money:

Do not use the funds saved for your child's future

However important this house is for you do not withdraw money from your child's education or marriage fund. To fund their initial down payment, many dip into the savings and investments they made for their children's future (their education and marriage needs). You surely would not like to compromise on your child's education, so why jeopardize the goals you have set to plan your kids future.

Do not touch your retirement kitty

Many tend to ignore the importance of their retirement kitty and assume that since they still have many years to retire they will save in future. Mind you once the EMI payment starts, again making up for such goals becomes a herculean task. It becomes a vicious circle, and often one starts feeling the debt burden although the house is purchased in the interest of family. Peace of mind is lost! In addition, the plan to retire early is completely derailed.

Instead of using your retirement savings, you can opt for a loan against your PPF account to meet the overhead expenses. As you might be aware, there are several hidden costs involved in availing a home-loan; you should wisely learn about other options available for financing.

Select a financing product diligently

There would be many banks and NBFC (Non-Banking Finance Companies) ready to offer you pre-approved personal loan in 30 minutes. Personal loans in India are categorised as unsecured. So, the interest rates are higher compared to other secured loans (i.e. home loans, car loans etc.). The interest rates are in the range of 11%-25% p.a. and the period ranges from 1-5 years.

Hence, do not make a hasty decision. Read the fine print of the loan brochure/document. Check for all the terms & conditions and learn about all the costs associated with it.

Do not touch your contingency fund

At any given point of time you should not withdraw money from your contingency fund, unless there is an emergency. As life is uncertain, you had set aside this money to meet the uncalled incidents. Instead your EMIs should be added to your monthly expenses while calculating the contingency fund.

Moreover, see to it that you have adequate life and health insurance. In case of any untoward event claiming life of the principal earner in the family; financial plan of the family may go completely out of whack.

To Sum-up...

A home loan is actually one of the best ways to build up your asset using a liability. You are effectively putting down some of your own money (the down payment) and gearing the rest (i.e. someone else is paying for it upfront, you are paying them back in instalments).

Buying property is something that all of us want to do at some point in our lives, and a home loan is effectively the best way to do that. Availing a home loan is not bad as long as one is rational and has sufficient means to service it. But do not let one goal jeopardise your other financial goals in life. You can certainly postpone your holiday or electronic purchase in order to meet the goal of home buying. But certainly, cannot put other life goals at stake.

Below are 8 vital points to bear in mind before you opt for a loan:

  1. Know your finances precisely
  2. Ascertain why you are borrowing
  3. Recognise what will be Debt-Income Ratio (D/I) (your total monthly debt commitments should not exceed 40% of your gross income)
  4. Have a plan of how to re-pay your loan
  5. Maintain a contingency fund
  6. Ensure you hold adequate insurance
  7. Save enough for your golden years i.e. Retirement, and
  8. Keep your family in the loop about your finances and important documents

Though loan facilities are available, you ought to take enough care before availing them.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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