Hello everybody I'm Arpit, and I'd like to welcome you all to this extremely important topic on How to buy your ideal home.
This post is not for you if you're initially unsure about whether you should buy a house or rent a house. On the subject of whether you should rent or buy a home, I have already written a separate post. Please take a moment to read that post as well when you have time.
Now that you've made up your mind to buy a house, you can start asking yourself what your budget for the down payment on your mortgage will be and other topics that weren't covered in the preamble to this piece. then, here we are. Let me offer you the same information pill, and then let's go on to the next section of the article.
What should your household budget be is the first and most crucial question we should address. Is there a general rule that applies here or not?
The answer is obviously yes, and the general norm is something like 5-20-40 of what? 5-20-40 In essence, it states that the price of your home shouldn't be greater than five times your annual income at this same moment, what is this 20 If you're taking out a loan to buy a property, the maximum loan term is 20 years, but what is 40 years? the maximum EMI amount should be 40% of your gross income?
What should be the budget for your house?
Okay, I hope you now understand what 5, 20, and 40 are. But hold on, you might be thinking, "But what if my salary is, say, 10 lakhs?" You're now stating the "five-car rule." Thus, multiplying 10 lakh by five will result in 50 lakhs. In a place like Pune, where I can purchase a decent enough property for 50 lakhs, the definition of income that I'm using in this essay is not your own income, but rather that of your family, correct? So if your salary is 10 lakhs and your husband's or spouse's salary is 10 lakhs, your family's total income, or 20 lakhs multiplied by five, equals a budget for your home of 1 crore. I hope it's crystal clear what I'm saying.
Now, let's move on to another crucial point. If you recall, I've already discussed the 50-30-20 rule numerous times. Now, if you recall, out of whatever income you make, 50% goes for essentials, 30% goes toward one-time expenses, and 20% is required to be saved. Now that you've declared that 40% of the prior rule will go toward your EMI, you might be less logical. You can see how if I put 40% of my EMI into this 50% (Requirements), I will only have 10% left over to cover my basic needs. Could that then become a problem? Yes. Basically, no one has stopped you from transferring the burden of the EMI from one area to another. But if you don't want to have that mental block as well, what can you do?
Please grasp the concept of house purchase. Do you need that? Yes. Do you also want that? Yes. Is that also a purchase? Yes. You could say that purchase is an investment in your lifestyle even if it's your first home. why not Right? If that is the case, you can divide your 40% EMI as follows: 20% for needs, 10% for wants, and 10% for savings. I hope this entire point has been clear enough to help you plan your first home budget.
Practical Example
So whatever we have discussed till now let me give you an amazing example so that the entire idea will be absolutely crystal clear. So let us take three cases of Mr. A, B, and C. Now the family income in all these three cases is set well like 12 lakhs, 18 lakhs, and 24 lakh, let's take out the monthly income as well dividing it by 12. These are the numbers for the monthly income. We're not going to need them now, but let's keep them for the time being. Now, if you remember I told you that what could be the exact cost of the house could be ideally five times your income. So simply 12 lakh multiplied by five is 60 lakhs same case with B and C it will come to 90 lakhs and 1 crore 20 lakhs respectively. Now, if you were to go ahead and take a loan to buy this house, always remember a thumb rule you will get a maximum of up to 80% of the cost of the house as a loan and a balanced 20% You will have to do a down payment.
Therefore, in Mr. A's example, the 60 lakhs will be divided into 20% and 80%, resulting in a down payment of 12 lakh and a loan amount of 48 lakhs. Mr. B and Mr. C will receive the same cases 20 and 80%. Let's go on to the EMI amount, which I took in our example at a fixed rate of 7.5%. Please realize that there are two rates at which we can obtain a house loan: one is known as a fixed rate and the other is known as a floating rate. But if I take a floating rate, then the calculations can be like really complex so far that I've taken a fixed rate. One more important point is that I have taken the tenure of the loan as 20 years why remember the 5 20 and 40 Rule strictly for that I've taken it.
How to repay 20 years loan in 10 years?
So if you have a look at the chart, you can see that 7.5% For 20 years for Mr. A comes to 38,006 68. For B it comes to 58,003 and for C it comes to 77,003 37. Now if I calculate EMI as a percentage of monthly income, for an I can see I'll calculate that as 38,006 68 divided by one lakh and that comes to around 39% of the monthly income for B it is exactly the same. And same goes for C. All in all, I can say that in the case of A or B, or C it is fitting into the 40% criteria. But then I'm sure you might again have a question if this is so is there any magic trick? Is there any amazing stat through which I can get confidence that yes, I can repay this 20 or slower in a matter of 10 years? And for that just have a look at this amazing stat.
Let's use Mr. A as an example. His loan amount was 48 lakhs, and if he had paid it off entirely with the standard EMI amount, he could have done so in just 20 years. However, if he had chosen a different course of action, one that would have increased the EMI by only 2% He could have paid off the loan in full in 15.5 years. Let me suggest an alternative: if he had chosen to take out a 5% Extra EMI, he could have paid off the entire loan in 12.5 years. Then a magic potion appears.
If he had continued with one extra EMI each year, he would have been able to pay off the full loan, which should have taken 20 years, in just 10.5 years. However, how does the math for one extra EMI each year work? Let's stick with Mr. A from the previous example and say that his EMI was, say, 10,000 right each month. Therefore, let's first simplify the scenario and begin with year 1. Please explain if EMI was 10,000. How much did he pay in EMIs overall during the year? (10,000 multiplied by 12). His entire EMI was therefore Rs. 1 lakh 20,000. Therefore, the total cash outflow is 1,20,000.
Now what are we going to do in year two, I will say that okay anyways am going to pay one lakh 20,000. But in addition to that, the previous year's cash flow divided by 12 means what one-month extra cash flow he has to pay this year. So, the previous year's cash flow was almost one lakh 20,000 divided by 12. So, that comes to 10,000. So, this year he will be paying 1,30,000 as the total cash outflow right. Now, what will happen with her three now, let us understand, see, your three bases is now at 1,30,000, If he was able to pay one lakh 30,000 In year two, why can't you pay one luckily because we are three obviously. So, now base of cash outflow is going to be one lakh 30,000 Plus what? One month's cash outflow of the previous year so, it is going to be 1,30,000 divided by 12 = 10,008. So, now the total will come to 1,40,008. I hope you're understanding Mr. A word paid just one lakh 20,000 in year one, paid one lakh 30,000 In year two is paid 1,40,008 in year three.
Likewise, 1,52,569 will be the cash outflow for year 4. And in this way, I hope you have understood how his cash outflow is going to go on increasing year after year. And by this magic math trick, he will be in a position to repay the entire loan in just 10.5 years. But now, the big question is that, at the end of the 10th year, you can imagine to what amount this cash outflow might have gone. And now, you will challenge me on how on earth will that be 40% of the total income, right? That 5 20 and 40 that 40% rule might not be met. But for that I have a counter for you, please understand that your monthly income or your yearly income is not going to remain constant over the period of 10 years, whatever your income in year one, and whatever would be your income in year 10, there will be a big difference in that as well. Right. So, I hope you have understood this magic trick of repaying the loan in just half of the tenure.
What is the ideal time to buy a house?
Now, let's move on to the next question what could be the ideal time to buy your first house when the simple answer to that is earlier the better now, why? Because right now, I told you that your repayment of the loan the tenure is ideally going to be somewhere around 20 years. In fact, there are certain cases where you can even repay the loan for up to 30 years also, we have not discussed this, that in this post. But even if I were to take 20 years as a timeframe, you can imagine if a person were to take a loan at the age of 40 then what would be the working life that is very limited for him. So, his working life and the working life and loan repayment will almost coincide in that case banks might not be that keen to give loans to a person who is in his 40s basically, if a person is in his 20s then, in that case, the working life of that person is quite large and banks would be much more happy and willing to give loan to such a person, of course, other conditions like his credit score and all that that will be checked by the bank no doubt about that.
How should you finance your house?
Well, this is in place now the next big question is how should you finance your house? So you're you have two options. One does cash down and buy a house Oh my god, they'll be really very few people who will be able to do that majority of you will fall in the category of taking a loan and buying a house same happened with me when I bought the house right. Now, what is the biggest advantage if you buy the house with the entire cash down whatever the cost of the house will be your actual cash outflow nothing extra biggest positive, what could be the negative side though, whatever is your amount with you that will be completely blocked on the major amount will be blocked in one single investment that is a real estate investment? And that is why the opportunity cost of these funds can be higher, right?
Let's go ahead with the loan amount or the loan perspective. In that case, you have three major advantages one is the tax angle, and the second one is the legal angle. And the third one is from a personal finance perspective, what is the biggest positive from the tax angle number one you get two lakh rupees per owner as a tax benefit for the interest amount. And number two, you get 1.5 lakh rupees per owner from the principal repayment perspective. Okay, so to tax benefits, if I'm talking about the legal point, the biggest advantage if you take a loan, what see the bank is going to do due diligence bank is want to see whether all the documents are in place, whether the title is clear, and then only they're going to give you a loan. So you are very much you are going to have peace of mind when you're taking a loan to buy the house property.
Now if I'm talking about the personal finance angle, what is the benefit of taking a loan? First and foremost because you know that a huge chunk of your monthly income is going towards the EMI repayment, you will be automatically you will be frugal while you know to spend for other expenses. The number two important point is that if you're repaying your home loans regularly, your CIBIL score will also automatically improve. And number three is that your entire money is not being blocked in a single investment avenue. That is the reason why you will have some funds free to invest in other investment avenues.
What is the biggest downside if you go ahead with a loan, the actual cost of your house will be way too higher because of the interest component of the loan amount.
Four additional important points
Let's move ahead with four additional important points that you must consider before you're buying a house property.
Number 1, is that whenever you're finalizing any house property and if that project is registered under era, I will highly recommend that you go and check out the website and where you can see a lot of disclosures that are mandatory to be given by the builder. Now, I'll give you my personal example. I had almost finalized a house property and that builder had told me that we have a fantastic basketball court is all these amenities inside our society? When I checked on the RERA website, I found out that there is no basketball court, which was in the scheme. After looking at all these disclosures, I decided that the builder is not very true and honest, and that is the reason why I canceled my decision. And I decided to move into another house property.
Number 2, one more very important point is that if you want to take a decision if you wish to go ahead with an under-construction property, or ready-to-move-in property, my personal suggestion would be you should go ahead with a ready-to-move property. Why, just in case the builder is not able to complete the construction in time, in that case, you have to pay the EMI Plus, you're also paying the home rent. So it's a double cash outflow that is happening at your end plus the tension of whether the property will be really completed or not, which is extra. So again, to sum it up, my recommendation would be to go ahead with a ready-to-move-in house property.
And last and third one is that you should ensure that you are having proper home insurance when you are taking a decision to buy a real estate property. Well, is there is that all know, one last an important point is that just have a look at this, whenever you're buying any house, it is not only the basic cost of the house but all these additional charges also which you have to bear. So keep all these costs in mind and then only take your final decision.
What qualitative factors should be considered?
Well, whatever we discussed till now all that are the quantitative factors? What about qualitative factors. So all the factors that you have to look at before you buy the house, the qualitative factors are something like this, when the very first one is emotional security. I mean, those who have been living in an old house since your birth, will not be able to understand this point of emotional security, but any person who has stayed in a rented house and has had the pain to change house after every 11 months can definitely agree to this point that finally shifting to your own house. So I think that is an emotional point that definitely gets added up.
The second one is capital appreciation. If you're owning the house, then whatever the case on average 6% capital appreciation is what we have seen, that's the CAGR of capital appreciation over the last few years. But the third one is that finally even if you're taking a house property with the help of a loan, the moment you're paying your EMI as and how you want to repay the loan, your equity, your ownership in the house goes on truly increasing. So even if it is taken on loan, finally, you're building an additional asset for yourself.
And last but not the least, if you're buying a house property, there is no landlord hustle. Otherwise, you have to ask for all the small things to the landlord and then only take a final decision. I hope with the help of this article, you can understand all the qualitative factors as well as quantitative factors once you decide to buy a house. But if you still want to know more about whether you should buy a house or rent a house, you can comment below.
