There is some fancy about owning a house. For ages, a house has been considered the ‘best investment’. A house of your own happens to be a dream for most people.
There’s something emotional about it too. Your parents, your relatives, everyone recommends to buy a house.
“Khud ka ek ghar to hona hi chahiye!” (You should have one home of your own).
And then you see those full page advertisements giving away fancy deals, offers that promise nothing less than heaven. The banks too are willing to give you loans at ‘easy EMIs‘.
Combine all this, you are willing to stretch yourself to any extent to get your dream home.
“Can we take a break please and look at some important issues?”
The other side of buying a house
Don’t buy a house because the full page advertisements tell you to buy as they entice you with their grand offers. They are thinking about themselves and their sales, not you.
Not also because your friends, family and relatives are asking you to do it. Yes, they are acting out of concern and affection. Yet!
You have to think for yourself, your needs, your goals.
Here are some pointers for you to think:
# Can you really afford it?
As it is, buying a house turns is probably your first major borrowing decision you. You will have to service your loan through EMIs every month. Look at your cash flow – the total of your EMIs (including home+car+others) should not exceed 40% of your take home salary. That’s what the bank/lender also looks at.
What’s the logic? You will need money to take care of your monthly expenses, buy regular stuff and save for other needs too. If you have children you will need to pay for their tuition, etc.
Buying a house brings in other related expenses – broker fees, registration charges, stamp duty, municipal taxes, society maintenance, insurance, etc. Can your cash flows service them too?
# Are you ready for the downpayment?
While in most cases you can get the bank to finance 80% of the cost of buying a house, 20% of the cost has to be made as a downpayment. For example, if the house costs Rs. 70 lakhs, the downpayment you need to make is going to be about Rs. 15 lakhs. Is that money available with you? Can you take it out from your reserves without hurting your other goals?
# Is you emergency fund ready?
You should have sufficient liquidity available to you in emergency funds. It could be meeting regular expenses, if for any reason the cash inflow stops or for any unplanned expense that might arise. Once you are servicing an EMI, your emergency fund should provide for that too.
Typically, an emergency fund should have about 6 months of your monthly expenses including EMIs. Is your emergency fund ready for that?
# What’s your credit score?
Can you get a great deal on your loan – I mean the interest rate? If your credit score is not good, the bank may treat you as a riskier customer and charge you a higher rate of interest. Sometimes, a not so good credit report and score can lead to rejection of loan too.
You should have a credit score of close to 800 to be able to bargain for a lower interest rate.
Think about these points before you make a final decision.
Buying a house – when it is a no-no
- Do not buy property because everyone else, including your friends, colleagues and relatives, is also buying. Keep the emotions aside and think what is right for you, with the resources that you have.
- Carefully study the profile of the builder or developer of the property. Go with an A rated builder with a proven track record. It will benefit you to know that till date there is no regulation on real estate so you have little help available to protect yourself from greedy builders. If that is not the case, better stay away than suffer from poor quality construction, legal ownership issues, etc. This still doesn’t guarantee anything but good homework can save you a lot of pain.
- Don’t just look at the price (only 50 lakhs for a 2 BHK)! Look at the space. Understand terms like super built up, built up, carpet area. There is a whole world of thuggery that exists between the super built up to carpet. What you thought was a mansion turns out to be a pigeon hole.
- Do not let a property purchase become a financial burden. You have to arrange for the down payment as well as service monthly EMIs. Take only as much loan, which will enable you to serve the EMI as well as leave enough for taking care of other, expenses plus emergency savings. A good thumb rule is that your EMI payment should not exceed 40% of your take home pay.
- Don’t be driven by FOMO – Fear of Missing Out. You think something like this – “oh, this is a great property. And the limited period offer is going to be over anytime. What if there is nothing left? Prices will rise and it will soon be unaffordable too. I should buy it now before it is over.” You see, you are deluding yourself emotionally. The worst financial decisions are made because of FOMO. Don’t give in. Save yourself.
- Know that Real estate suffers from illiquidity. There is no stock exchange where properties are bought and sold in an instant and you can get your money in a few days. Nor can it be sold in parts. You can’t sell one room if you need some money. So do not block a large amount of your money in real estate.
Is it really necessary to buy a house?
Societal wisdom would have you believe so. But there is another point of view. Don’t buy a house. Instead, focus on what matters to you.
Actually, it depends on what are your priorities?
I have a friend, who consciously stayed away from buying a house and accumulated money because he had a different priority. He wanted to startup on his own, build his own business. He stayed put through all the craziness surrounding him and finally today he is glad he has the money to bootstrap his startup.
For him, his goal of starting up was more important than putting money into an illiquid asset. A friend who sold his second apartment declared that he earned nothing more than an FD.
Yet another friend declared recently, “no buying houses for me.”
The question for you – Is buying a house a priority? Or, there are bigger life goals that you want to work towards.
Between you and me: What’s your house decision? What factors do you put into consideration for making this decision of buying a house? As always, love to hear from you. Do post your comments.
Nice article Vipin. Hopefully it’ll help people break the dilemma about owning a house.
Few years back i was desperately considering to buy a flat but as my knowledge increased about savings & investments in financial products, my earlier belief of buying a house fade away. You’ve correctly said that it’s really important to identify one’s priority about utilization of money.
Thanks Manish. As always, it is easier said than done 🙂