How to calculate the budget to buy a home?

Purchasing a property is a significant investment in our lives, and financial planning is the most crucial and foremost step in this journey. Estimating the potential costs and setting up a budget for your house purchase can streamline this process, giving you less stress about unexpected expenditures. Most buyers choose home loans as it is a prudent choice rather than spending all their hard-earned savings. Property prices are steadily rising, and with property purchasing being a time-consuming process that spans several months, budget planning should be done while considering the future costs of homebuying. For those planning to buy a house, it is wise to start saving at least three to four years in advance. In this guide, we bring useful tips to plan your finances to purchase your dream house without any hassles.

Tips for budget planning for house purchase

#1. Determine the cost you can afford

Before you begin with the budget planning, you must have a fair idea of the affordability of your home ownership. Assess your financial situation to ascertain whether you are ready to make significant investments for your house purchase. You can start by tracking your monthly expenses, outstanding debts and monthly savings. This will give you a clear picture of your current financial position and decide if you can make significant down payments and pay your EMIs. With this plan, you can gauge the cost you can afford to purchase a house. At this stage, you should decide the property’s price range that best suits your pocket.

Click to read more about how to assess affordability for home ownership?

#2. Improve your credit score

Maintaining a good credit score is essential to secure the best home loan with lower interest rates. Lenders consider credit score to be an important factor when approving loans. Take a look at your credit report. A good credit score between 700 and 900 signifies a higher chance of obtaining a higher loan amount at a low interest rate. To ensure you get a good credit score, make sure to ensure timely payment of credit card bills and pay off any unpaid dues without any delays. This is a crucial step in your budget planning for a home purchase. By ensuring a good credit score, you can expect to get a higher loan amount. Thus, you can focus on buying a property in the higher budget range.

Here are more ways to improve your CIBIL score

#3. Save for down payments

Potential buyers must know that lenders do not finance the entire cost of the property. They give loans for 80-90% of the property cost, paid as EMIs. The buyer must pay the remaining 20% amount as upfront expenses, known as a down payment. Hence, one must start making significant savings to cover these expenses. Opening a savings account in your bank or opting for investment in mutual funds through SIPs is a good option.

#4. Consider lifestyle changes to grow savings

A major step you can make towards building your finances for your house purchase is to make some changes in your lifestyle. As an example, if you are living on rent, you can relocate to another locality for a lesser rent. You will be able to save a significant amount every month and save this money as your house purchase funds. Another idea could be starting a part-time job to gain additional income. You may even consider reducing your vacation trips or entertainment expenses so that you can save for your dream home.

#5. Monetise your assets

Monetising some of your assets can help you achieve substantial savings for making down payments. For example, you can decide whether to liquidate your fixed deposit. Alternatively, you can consider borrowing against the fixed deposit. Another option could be a partial withdrawal from your Employees’ Provident Fund account. Experts suggest not to go for credit cards and personal loans, given their high interest rates and financial burden.

How to calculate the budget to buy a home?

#1. Assess the market value of properties

Estimate the price of properties that you plan to buy in a city. Potential buyers must conduct a property valuation to estimate a realistic property price. Perform a thorough research on the neighbourhood where you plan to buy the house. Assess the price trends of similar properties in your area over the past few years. At this stage, you can hire a real estate agent who knows the market and can assist you with relevant data. Alternatively, you can check for information on price trends online. You can even get professional property valuation services available at reasonable rates.

Property prices in a locality are greatly influenced by the following factors:

• Infrastructure developments such as metro projects or flyovers
• Demand and supply of properties in the locality
• Availability of inventory of homes
• Home loan interest rates
• Presence of amenities within the society
• Accessibility to social infrastructural facilities

#2. GST charges

In India, Goods and Services Tax (GST) applies if you purchase an under-construction property and not on ready-to-move-in homes. GST on residential properties depends on factors such as property type (affordable or luxury), construction phase, property value, etc. The GST on an under-construction flat (affordable housing) was 8% with input Tax Credit (ITC) till March 2019 but was revised to 1% without ITC from April 2019, GST on luxury flats was 12% with ITC and was changed to 5% without ITC from April 2019 onwards.

#3. Brokerage charges, lawyer’s fee and other expenses

Typically, brokers charge around 2% of the property cost from buyers and sellers. For example, if you plan to purchase a house for Rs 25 lakh, you will have to spend Rs 50,000 as the brokerage fee. Similarly, home buyers generally take the help of lawyers for documentation and due diligence. Consider a sum of around Rs 10,000 for lawyer’s expenses for property document verification or other services.

#4. Property registration charges and stamp duty payment

A crucial stage in the property-buying journey is the registration process. The stamp duty and registration charges may vary depending on the state where you are buying the property. Most states have an official website providing information on stamp duty and registration charges. Stamp duty can range from 3% if you buy a property in Delhi to 11% in Rajasthan. Make sure to check these sites to know the latest data.

Stamp duty and registration charges are often levied on the higher value of the two values – the circle rate (the minimum property value determined by the government) or the market value (determined by the sellers based on market trends).

#5. Parking and maintenance charges

There are some additional expenses that new home buyers must bear. These include the charges of owning a parking space in the new property and society maintenance charges. The parking charges may increase with the number of vehicles you own. The parking charges may vary from Rs 1 lakh to Rs 5 lakh, depending on the location.

#6. Home loan processing fees and EMIs

Lenders levy a specified fee for processing home loan applications, which covers the lender’s basic administration costs and expenses to conduct credit checks, document verification, etc. Potential home buyers can compare processing fees charged by different lenders and opt for the one that charges the lowest fees.

Further, EMIs are the monthly instalments the borrower must pay the lender to repay the loan.

Experts suggest the thumb rule of ensuring the total EMI cost does not exceed 40% of the monthly salary. However, one should also take into account other debts and financial obligations when determining how much they can afford to spend on their home loans. That is, it becomes crucial to assess your financial situation, especially when you are servicing other loans. It is better to clear your existing loans and start saving for your future loans and other expenses during the home buying journey. Paying off your existing loans will improve your credit score and reduce your debt-to-income ratio, thus making your eligible for a higher loan amount.

Further, home loan lenders should look at the prospective borrower’s debt-to-income ratio when processing loan application. The debt-to-income ratio is calculated by dividing one’s total monthly debt to the gross monthly income. For example, if one’s loan EMI is Rs 15,000 and other expenses are Rs 20,000. Then, the total monthly expense is Rs 35,000. Let us assume the monthly salary is Rs 90,000. The debt-to-income ratio will be 38%. This could be too high. However, lenders may consider other factors before processing the loan. Ideally, a debt-to-income ratio should be less than 35%.

#7. Location preference charges

These are among the hidden costs that potential buyers should know, as they can significantly increase their property purchase costs. Developers may charge an additional amount for properties with advantageous locations, such as sea-facing properties, a house with a terrace garden, or access to luxury amenities.

#8. Costs of moving and interior design

If you are purchasing a new property, you may have to factor in the costs of moving, packing, and interior design for your new house. You can get quotes from these service providers, which will help plan your budget more efficiently.

Example:

Now, let us consider a scenario where Mr. A want to buy a ready-to-move-in house in Noida. Based on his research, he has opted for a residential property for a price of Rs 50 Lakh. He has availed of the services of a real estate broker to find the property, and the charges are 2%. Mr. A has availed a home loan, the lender has levied a fee of 0.5% of the loan amount, and the EMIs to be paid is Rs 30,000.

The expenses he should consider include:

• Property cost: Rs 50 lakh
• GST: 0
• Brokerage charges: Rs 1 lakh
• Stamp duty and registration charges in Noida, which are 7% and 1%, respectively: Rs 3.5 lakh and Rs 50,000
• Home loan processing fee: Rs 20,000
• Home loan EMIs: Rs 30,000

So, the total budget Mr. A should consider is Rs 55.5 lakh. In addition, he should make provisions for the monthly EMI payments and other expenses such as annual property taxes, monthly maintenance, etc.

Housing.com News Viewpoint

Homeownership comes with significant expenses. Some expenses, such as EMIs, property taxes, maintenance charges, etc., continue for a longer time, unlike the other one-time expenses. Thus, it is crucial to take sufficient time and create a proper financial plan for your house purchase.

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