Are you financially ready to buy a house?
Ansh Mehta is 32 and works for a leading software company. He is getting married soon and therefore wants to buy a house. His income is stable and he expects to stay in the same city for a considerable time. Mehta knows this will be a big financial decision which will have a significant impact on his finances. He wants to make sure that the financial aspects of acquiring the house are as smooth as possible and that he is ready for the big-ticket purchase.Ansh Mehta must be ready to make the long-term financial commitment that buying a house entails since it may require him to change his spending and saving habits, at least in the immediate future. To make the change as comfortable as possible, he must first decide a budget for the house. This will depend upon the level of EMI obligation that he will be able to service. An efficient way of calculating this is by drawing up a household budget that will consider his expanded income in the future as well as higher expenses as his family grows. The other immediate financial requirement that he must be ready for will be the down payment that he will have to pay.
Housing finance companies usually evaluate this at approximately 20%of the cost of the house. Mehta must make arrangements for this sum too from the savings and investment that he has made over the years. It is important for Mehta to strike a fine balance between taking on a commitment that will put too much pressure on his income and going that extra mile to cutting back expenses. The house that he is considering must be adequate to meet his family’s living requirements for at least the next 8-10 years and he must be willing to stretch to make that happen. On the other hand, he must be wary about overshooting the budget because he will also have to fund other costs related to the acquisition, such as the broker charges, stamp duty and registration fees as well as expenses related to furnishing the house. Any overrun on the budget will put pressure on his income.
After Mehta has fixed his budget, he must shop around for good loan terms and get a prior loan approval so that he does not lose out on his preferred home just because the finances were not in place. He must look for options in structuring the loan which will suit him, such as step-up loans which will allow him to pay higher EMIs later in the loan tenure when his income is higher. Similarly, he must start liquidating his investments that are going to fund the down payment and move the money in to liquid investments that he can easily access without any delay or loss in value.
Doing all this will ensure that Mehta is ready to deal with this key milestone in his financial life.
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Tax Cognition
