Since money remains the biggest concern for homebuyers, financial planning is quite crucial before they start the home purchase journey. To help such buyers, we share with you the best hacks to plan your finances for buying a home. The tips shared in this article are extracted out of a webinar recently conducted by online real estate company Housing.com in association with Kotak Mahindra Bank.
(Watch the webinar on our Facebook page.)
The panelists at the webinar included Sanjay Garyali, business head – housing finance and emerging market mortgages, Kotak Mahindra Bank and Vikas Wadhawan, group CFO, Housing.com, Makaan.com and PropTiger. The session was moderated by Jhumur Ghosh, editor-in-chief of Housing.com News.
Taking a home loan: A burden or an asset?
To find an answer to this question, you have to understand what a home loan is.
“A home loan helps you create an asset at a rate of interest which is very competitive. You are creating a stable asset that has a long shelf life and has the potential to appreciate,” said Sanjay Garyali, business head – housing finance and emerging market mortgages, Kotak Mahindra Bank. So, one has to be clear that a home loan is never the basic requirement, buying the house is.
This means that going forward, the asset that you are creating will surely be of much more value than the home loan that you will be taking.
“From a balance sheet perspective, by taking a home loan, you are doing a new accretion- it is not a liability added to your balance sheet without any asset backing it. So, from a leverage perspective, if you have some surplus funds, you can deploy them in the markets and easily generate returns to the tune of 9-13%. On the other hand, you will be only paying a home loan interest of 6-7%,” said Vikas Wadhawan, group CFO, Housing.com, Makaan.com and PropTiger.
Saving versus Investing: What works better?
A common query among people with low risk appetite is how can one build their desired corpus? Should it be saving or investing or a combination of both?
“You cannot invest unless you save. While debt instruments like fixed deposits in banks are completely safe, the returns offered by them are typically almost equal or slightly lower than the inflation rate. Thus, this is not an accretion to the value of money you are saving. On the other hand, equity investments give you much better returns that are definitely higher than the inflation rates. Taking a balanced approach will always help where you plan your savings in both debt and the equity side,” explained Wadhwan.
According to Garyali, if there is no risk, there is no return. Citing an example, he said, “Investing in only savings accounts means even after 10 years, the interest will be a 4-5% that the bank gives. With inflation around 6-7%, your money actually reduces the lesser ability you have to take risks. Matching your goals with the portfolio you are creating will help you easily make 6-7% returns higher than the inflation rate in a developing country like India, but the very critical thing that has to be understood is that it has to be medium to long term.”
See also: How to decide between staying on rent and buying a home?
Prerequisites for purchasing a home: A checklist
While buying a home includes many important things like location, configuration, due diligence, etc., there are some critical tips with respect to preparing finances.
A good CIBIL score is very important to get a home loan. Secondly, you should be having your own corpus so that you can make the down payment easily.
Garyali also added that one has to be very certain about their future earnings before taking the plunge. “While your bank does not look at your future earnings – it looks at your past earnings and grants you the loan – you cannot default on your EMIs,” he said.
See also: What is SARFAESI Act and how does it apply to home loan default?
Apart from preparing for finances, an end-user should zero in on the location and map the micro markets from a location perspective that suit his requirements. “A personal visit to these micro markets is a must to evaluate prevalent pricing, how the neighbourhood is, etc. Finally, you have to proceed to your choice of configuration, the stage of property you would be investing in- under construction, ready-to-move-in or resale etc., due diligence with respect to the property etc. This will again take you around 6 months of planning and preparation before you finally make the decision,” pointed out Wadhwan.
Ready-to-move-in versus under-construction property: Financial preparedness
What is the difference between financial preparedness associated with buying under-construction and ready-to-move-in properties?
Explaining in detail, Garyali said, “In the ready-to-move in property, your entire contribution needs to go upfront, an advantage is that your rent stops. The only risk because of which customers would get gravitated towards ready-to-move-in as compared to under-construction previously was the builder risk. This has drastically come down because of government initiatives like RERA and ‘SWAMIH’ Scheme. More such schemes will come going forward because it is of great importance that real estate confidence is prevalent. Also, today with the presence of credible developers in the market, the end product is exactly the same as what is shown to the consumer as part of the sample flat when it comes to under construction home buying. Gone are the days when you would see something in a sample flat and get something else in the final product.”
So, one can make the decision by just evaluating- if you have the money upfront, go for a ready-to-move in. If you don’t have money upfront and want to go in a phased manner, then opt for an under construction project.
Financial preparedness for reserve corpus
When building a corpus, how much of it should be your reserve money? Traditionally, if home buyers could pay three consecutive home loan EMIs month to month without any problem, then they were considered being financially sound. But, does this thumb rule still hold true in this pandemic spread world? “With the uncertainty of the third wave still looming over our head and the additional financial impacts that COVID got along with, at least six months of reserve corpus is needed to be in a good financial space,” said Wadhwan.
Adding to this Garyali also mentioned ‘reskilling oneself’ may come up in a big way going forward and a reserve corpus of one year would definitely be recommended, with at least six months being the minimum requirement, while building your portfolio.
Home loans for senior citizens and millennials
During this COVID period, senior living community homes have become popular with many senior citizens preferring to stay with people of similar age group and close to basic facilities especially healthcare. “While senior living communities are very common in most countries, this concept is now getting stronger in India also with people actively searching for senior living communities where they can enjoy their retired life,” said Wadhwan.
Home loans are available across segments, even for the senior citizens. “Someone who will retire in five years wants a high EMI initially, which will fall going forward. On the other hand, millenials want a smaller EMI in the beginning, which can increase going forward. So, the concept of EMI is changing with a step up and a step down approach with many home loan products being made available suiting this according to the age group,” explained Garyali.
Importance of home loan insurance
“The pandemic has taught us that we should insure everything necessary including us and our property, our home loan, etc. The cost of insurance is negligible as compared to the loss incurred. So, while previously, people would not look at insuring their homes, the increase in fire incidents especially in ‘A’ grade buildings have resulted in people taking home insurance seriously. Remember that any fresh liability you take, you have to insure it irrespective of the previous loans that you have taken,” said Garyali.
Also read: Home insurance vs home loan insurance
Financial preparedness for interiors of the property
While we spend our life savings on the property, what many people overlook while planning for the finances is the cost of interiors according to the aspirations of the family members. Garyali said: “A home is an extension of your personality. What a builder gives you is just a floor and four walls. While preparing the corpus, most people take into consideration property costs, stamp duty, registration costs etc. but oversee this important expenditure.” Missing out on calculating this cost may result in taking extreme steps like taking a personal loan and paying more interest on that.
Wadhwan stressed that while preparing a financial corpus, one should definitely add 10-15% costs for refurbishing the home- buying furniture, repainting the house, doing the interiors etc. which are all essential expenditures.
How to invest in a home and save money, as well?
With home buying being a very big purchase, you have to be careful on how you spend money on each and every aspect and where all the savings can be done. “It starts with a good negotiation that has to be done with the developer or the seller (in case of a resale property). While developers package their properties with a lot of freebies to attract customers, do read into it if you need it or not and negotiate well with the developer and save money. You can also save money because of the various government incentives like tax benefits under Section 80C for both single and jointly held properties, lower stamp duties for women in some states to encourage more women to foray into property buying, etc. Be meticulous in all these calculations as even 1% translates to a large chunk of money,” said Wadhwan.
Is now the right time to buy a home?
If you want to buy a home, there is never a better time than now. This is an asset that you are creating for your own consumption and the sentiment of owning a home has grown multi-fold during COVID, because now we know home is the safest place. “If you look at the last 4-5 years, the property prices have not gone up, but input costs like steel, cement costs etc. have definitely gone up due to the market inflation and because of disruption in supply chains owing to COVID. This means margins for the developers have shrunk significantly. In the last 2 years, with the unsold inventory going down, low margins and increased input costs that are becoming unsustainable, developers will eventually increase the prices. There are all the signals in the market that the property prices will increase in the next few quarters, thus making now a good time to invest in a home,” said Wadhwan.
Garyali concluded that low property rates because of an inflation of 5-6%, combined with low interest rates and your own eligibility of how much you can invest in and how financially secure you are in future should help you arrive at this decision of whether now is the right time.
