Budgeting basics for homebuyers planning for a new house

Budgeting helps homebuyers avoid costly mistakes. Financial experts do not recommend going for a property purchase without a proper budget plan in place. Property prices are rising in many cities, including metro and growing tier-2 cities. So, budgeting becomes crucial, especially given the several hidden costs associated with property purchases. In this guide, we discuss the basics of budgeting for a house purchase and share smart strategies for homebuyers to save money.

Importance of budgeting when buying a house

Budgeting for a house purchase is the process of having a proper financial plan to manage the various costs involved in the purchase. Setting up a budget ensures homebuyers do not end up purchasing a property that they cannot afford. It reduces their pressure on their savings while smartly managing loans. Budgeting equips a buyer to maintain a balance between property ownership and other major life goals.

Assess your financial situation

Arriving at the property budget one can afford requires a buyer to assess their financial position – their income, expenses, savings and liabilities. It gives a clear picture of how big a property they can afford. When evaluating the expenses and liabilities, one should count the debts, such as personal loans, car loans, etc.

Many finance experts say that a person’s EMI expenses should not exceed 40%-50% of the monthly income. A tight budget, where one has other loans to pay, a buyer may have to go for more affordable property options. Moreover, when checking finances, homebuyers should ensure they have an emergency fund of at least six months.

Calculate cost of buying property

The cost of buying a property does not merely include the price of the property one has purchased; rather, there are various associated costs. Stamp duty and registration charges form a significant part of the total property purchase cost. Besides, the GST charges, legal and documentation costs, brokerage fee, home furnishing and moving expenses, etc., form another significant chunk. Generally, these costs increase the property cost by 10%-15%. If a buyer does not plan for these expenses, it can create a financial burden and even impact savings.

Evaluate home loan liability

Applying for a home loan without doing the required calculations is a big mistake a buyer can make. Buyers must approach the home loan process by being realistic and focused on their current and future goals. Lenders offer home loans covering only 80%-90% of the property cost, and the remaining must be paid upfront by the homebuyer. So, one should check if they have adequate savings or other arrangements for the down payment. Experts also suggest that a buyer should not go for the maximum amount a bank offers, as it can lead to a higher EMI burden.

There is a crucial point that home loan borrowers should never ignore – the interest rates. They must decide between fixed and floating rates after comparing the costs. Besides, changes in repo rate can impact their monthly EMIs. So, buyers need to plan for these scenarios.

Plan for future needs

When buying a house and availing home loans, buyers need to keep their long-term goals in mind. That is, they should have an idea of the potential increase in their household expenses due to factors such as growing family needs and inflation. During budgeting, buyers must plan adequately for expenses such as children’s education, family healthcare needs and job changes.

Budgeting based on location

Property prices vary significantly across cities, with metro cities witnessing skyrocketing prices. So, purchasing a house in a metro city will be costlier, which implies higher loan amounts and higher EMIs to pay. Moreover, associated costs like stamp duty and cost of living also tend to be higher in these cities. On the other hand, if one is buying a house in a tier-2 or a tier-3 city, there are chances of getting affordable options with a lower purchase cost. Similarly, the cost of buying also depends on the type of property a buyer is targeting. A spacious apartment in a gated housing project will involve a lot of money, including high parking and maintenance charges, whereas a builder floor in an affordable neighbourhood can cost less.

Housing.com POV

Every buyer’s homebuying journey should start with budgeting. An important step in this process is to start saving early. Adopting smart saving strategies can help buyers build a substantial amount, which helps in making down payments and handling various costs. In this stage, buyers must maintain a good credit score to avoid higher loan costs.

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