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How to plan for buying a house

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How to plan for buying a house

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In 2020, around 64% of people in a survey in India were looking to buy a house. In 2021, that number rose to 82%. If you count yourself among them, it’s important to plan your purchase right. You need to take into account a number of important things. 

What kind of house do you want to buy?

Where do you want your house to be?

How much money should you save before buying a house in India?

These are all important questions. Not sure you know the answers to them? Let's go through the steps involved in buying a house for the first time. 

Figure out your budget

This is the first thing you should take care of. Figure out how much you can afford to pay for a house. You'd be surprised to know the difference between the true cost of owning a home as compared to what you're shown on a surface level. If you plan to take a housing loan, your EMIs should typically make up around 30% of your monthly income - assuming you don’t have any other loans or debts. 

Here are some numbers to help make this clear. 

  • Say your net salary is ₹80,000 a month.
  • So, your monthly EMIs should be around ₹24,000 (30% of your salary).

Working backward, assuming that your housing loan has an interest rate of 7% and that you plan to repay it over 20 years, you can borrow around ₹30 lakhs. 

The budget is one of the most important aspects of financial planning for buying a house in India. If you overspend and choose a house that costs more than you can afford, you may eventually be unable to repay the loan. And your house may be seized by the bank to account for your default. That’s not a pretty picture. So, it’s best to look for a house that fits comfortably into your budget. 

Location, location, location 

What are the three things that matter the most in real estate? 

Location, location, location.

So, finding the right location is the next thing on our list of steps to buying a house for the first time. Here are some things to consider when shortlisting a locality or a neighbourhood.

  • Is it well-connected with your workplace?
  • Is it well-connected with your spouse’s workplace?
  • Are there any good schools and hospitals nearby?
  • Is it well-connected to your parent's home (if you’re in the same city)?
  • Is the locality a resident-friendly area?

Check the real estate forecast

Apart from the factors listed above, it’s also a good idea to check the real estate forecast for the localities you’ve shortlisted. There's usually so much confusion in the information around real estate, it's best to clear this asymmetry. For instance, if you’re going to buy a house in 2022, check the forecasts and predictions for the past 2 years. This way, you’ll get a much better idea of which localities are becoming more popular, and which ones are falling in favour.

And as a rule of thumb, it’s generally a good idea to opt for a popular locality, so you can get a decent resale value in case you decide to sell your house later.

Decide on the kind of house you want

Houses come in all shapes and sizes. And a major part of how to plan for buying a house in India revolves around selecting the kind of house you want to buy. You may want an independent villa, your spouse may prefer an apartment, and your parents - if they live with you - may want something else altogether.

But before you move on to the financial planning for buying a house in India, it’s essential to zero in on the kind of house you wish to buy. 

Here are some aspects that you need to weigh out and decide on - 

  • Whether you wish to live in an independent house or in an apartment complex
  • Whether you want to live in a gated society
  • The number of bedrooms you need in your house 
  • What size do you want your house to be
  • The amenities and facilities you want in your house

And then, get the finances ready 

This may be the last thing on the list of steps to buying a house for the first time, but it’s one of the most important things you need to do. There are many aspects to think of here - like the down payment, the home loan EMIs, the loan tenure, interest rate and so much more. 

Take a look at this simplified home loan guide and begin your home loan journey. Here’s a checklist you can use to get started with financial planning for buying a house in India.

Step 1: Save for the down payment

Your home loan can definitely make it easier for you to afford a house. But you still need to pay a hefty sum out of your pocket before you avail a loan. This is the down payment, and it is generally around 15% to 20% of the price of the house. 

So, for a house that costs ₹80 lakhs, you need to pay around ₹12 lakhs to ₹16 lakhs as a down payment upfront. And for the rest of the cost, it’s your home loan to the rescue.

Step 2: Shop around for the best home loan rates

Home loan rates are not standardised. So, you still need to compare the rates offered by different lenders to find the most affordable home loan.

Plus, you need to choose between a fixed rate and a floating rate. Wondering how they’re different? Here’s a quick explainer.

  • Fixed rates: These rates remain fixed throughout the tenure of the loan.
  • Floating rates: These rates change during the loan tenure based on the market interest rates

Choose a home loan with a fixed rate of interest only if - 

  • You can afford the EMI you’ll be paying, since that will remain fixed during the tenure
  • You expect that home loan interest rates may rise in the future
  • You are comfortable with the current rate of interest and want to lock that rate for the entire loan tenure

On the other hand, a floating rate may be more appropriate if you believe interest rates may fall in the future.

Step 3: Pick the right loan repayment tenure

Your loan tenure directly affects your EMIs as well as the total interest you’ll be paying. As a rule, the longer the loan tenure, the higher the overall interest, but the lower each EMI will be. Let’s understand this with the help of an example.

Say you wish to borrow ₹50 lakh as a home loan, with interest at the rate of 7% per annum. Here’s how the overall interest as well as each EMI varies based on the loan repayment tenure.

See how the total interest increases and the EMI decreases as you raise the repayment tenure? That’s because with a longer tenure, you have more time to spread out the interest costs, leading to lower EMIs. But the total interest cost keeps going up.

A word to the wise:

  • Choose a longer tenure if you want to reduce your monthly EMI burden, and if you have a stable source of income with many working years ahead of you
  • Choose a shorter tenure if you can afford higher EMIs, and if you don’t have many working years left. 

Step 4: Make room for your EMIs in your budget 

Your loan amount, interest rates and tenure will give you a clear idea of the EMIs you’ve to pay. You can use the Fi EMI calculator for a clear picture of what this can look like. All you need to do is make sure your budget can accommodate the EMI. Do some stringent budgeting, cut out unnecessary expenses and check if you can pay the EMIs on time. Then - and only then - should you go ahead and avail the loan.

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