How much can you afford to buy a house for?
Your dream home can quickly turn into a financial nightmare if you don’t take a pragmatic approach and rein in your aspirations.
Everyone’s idea of a dream home may be different, but since money is an object for most, these aspirations should be toned down accordingly. However, most homebuyers end up stretching their finances when they take the plunge to turn their dream into a reality. But do you really need the bigger bedroom, attached terrace and Italian marble floors? In trying to buy that perfect home, you might end up denting your finances beyond repair. Further, the costs involved go far beyond the sticker price of the house, and if you don’t factored in the additional expenses, you might be in for an unpleasant surprise. Read on to find out how to prevent the roof over your head from becoming a burden on your finances.
WHAT CAN YOU AFFORD IN THE TOP INDIAN CITIES?
The number of years you need to save for the down payment.
We have assumed a savings rate of 25% of annual pre-tax income of Rs 8 lakh, and 10% expected return on savings.
The space you can buy in these cities with Rs 1 lakh
The values are calculated for a ready to occupy 1,000 sq. ft. home, based on Arthayantra’s analysis of average property price in the city.
Dream house or money pit?
According to experts, the aspirations of potential homebuyers have undergone a sea-change over the years. “For buyers, especially millennials, it is no longer about just owning a house or purchasing the biggest property they can afford. Homes have become a means of self-expression,” points out Adhil Shetty, CEO, BankBazaar.com. “Today’s home buyers are young, demanding and spoilt for choice. Rising income levels, as well as their easy access to credit fuelled by banks and housing finance companies, have boosted the aspirations of a growing consumer base,” adds Kanchana Krishnan, Director, Chennai, Knight Frank India.
Buying the dream home can be a very expensive affair, yet homebuyers are not averse to stretching their savings to the limit to make it happen. Since banks do not lend more than 80-85% of the value of the property, at the outset, the buyer has to shell out a lump sum as down payment of the house. Most end up taking a large chunk out of their life savings to make this payment and secure the home loan. An ET Wealth survey found that one out of every three Indian homebuyer is sinking in more than 50% of his total savings into the down-payment itself.
According to an analysis by ArthaYantra, the time required to accumulate the corpus for the initial down-payment across major cities is quite high—at an assumed annual savings rate of 25%, homebuyers in Mumbai will need roughly 12 years to save up the adequate amount, while those in Delhi and Chennai will need around seven years. But this is only the beginning, since what follows is committing to a large monthly outgo as EMI.
But it’s not enough to have the savings to cover the initial payment and manage the EMI outgo, since swankier homes come with a host of ancillary costs to budget for. First, you will have to shell out a higher amount as property tax and home insurance premium. Second, upscale housing complexes that offer luxuries like a clubhouse, garden area and tennis court can demand Rs 8,000-10,000 as society maintenance charges. Third, a bigger home means you will end up spending more on the upkeep of the house, as utility bills and the cost of repairs will be higher. Fourth, a fancy new place is also likely to set the tone for a more expensive lifestyle for you and your family.
“If you move into an upscale neighbourhood, you will be influenced to change your lifestyle as well, but your income and savings profile will not change overnight,” says Hemant Rustagi, CEO, Wiseinvest Advisors. Doing up the interiors of your home to match the impressive exterior can also set you back by a significant amount. It’s important to keep in mind that there is typically a close relation between the sticker price of the house and the expenses you will incur to keep it. “Homebuyers often overestimate their surplus and end up falling into a debt trap,” says Krishnan.
Getting value for money
At the outset, get rid of any illusions you have about being able to sell the property whenever you need to and get full value for the asset. Real estate is not high on liquidity, and the current market is enough proof of how difficult it is for sellers to find a buyer at a desirable price. “In the premium housing segment in particular, liquidity can be scarce, since what is aspirational for you may not be the same for others,” cautions Rustagi.
Further, banking on a rise in the value of the property in the future may come back to haunt you. It would be unwise to commit to a high-ticket home loan based on this expectation. The current real estate market is not ideal for investment, as prices are elevated in various pockets and rental yields are hardly attractive. Besides, market corrections are inevitable, even in housing. During 1997-2002, housing prices dropped more than 40-50% in Mumbai, even as some other regions remained relatively unscathed.
Another problem that plagues those who have bought under-construction homes is extensive delays in handover. They are often left in a limbo as developers leave projects incomplete due to severe cash crunch. For homebuyers opting for under construction properties, experts also advise against taking a large home loan to avail of tax benefits. The tax deduction on housing loan interest payment in such cases is restricted to Rs 30,000 per year, not Rs 2 lakh as allowed for fully constructed properties. Besides, the tax benefits will pale in comparison to the gamut of expenses that will come with a fancy house.
Is it worth it?
For most middle-class families, even if they manage to overcome all other difficulties, buying a home involves some form of compromise. Most stretch their budget to buy a bigger home than they can actually afford, in a locations that convey a superior sense of social ‘arrival’ but doesn’t necessarily offer a better lifestyle. “Homebuyers often give in to their yearning for an uncluttered, unpolluted environment and wind up marooned in an area beset by water and electricity shortages, without access to vital facilities. These homes will not appreciate in value, and therefore there’s no possibility of selling them and relocating,” says Anuj Puri, Chairman, ANAROCK Property Consultants. On the flip-side, some may prioritise an easy commute to work and end buying a home in a congested area that compromises their physical and mental well being.
Yet, perhaps the biggest price homebuyers pay for their soaring aspirations is the impact it has on their other critical financial goals. A bigger home will likely eat into your household income and savings significantly, forcing you to up compromise on other aspects of your family’s life.
You may think you can rebuild your savings in the future, but compounding needs time to work its magic—the later you start saving, the less power it will have. You might want to be able to provide your toddler with a large, airy room in a posh housing society complete with the swimming pool and playground he can enjoy. But would you let that desire sabotage his chances of having his higher education secured by your savings?
Buying a house you can easily afford can make a huge difference to your financial life. Suppose you stretch your budget and take a home loan of Rs 75 lakh for 20 years at 8.5% interest. Your EMIs will come to Rs 65,087, eating up Rs 81.2 lakh in interest payments over the lifetime of the loan. But if you opt for a smaller home instead, taking a housing loan of Rs 50 lakh housing loan to finance it, you will pay an EMI of Rs 43,391 per month, shelling out Rs 54.14 lakh in interest over the next 20 years. The monthly savings of Rs 22,000, if put into a diversified equity fund, can yield around Rs 49 lakh over the next 10 years at an expected return of 12%.
Committing to a large EMI will leave you very little breathing space to contribute meaningfully towards other goals, or even to deal with situations like suffering an extended illness or being laid off, which can lead to an unexpected cash crunch. Living in the house of your dreams may not be worth it if you are forced to cut corners elsewhere, like having to shelve vacation plans or cancel movie nights for your kids. “For many, buying their own house is an important, once-in-a-lifetime decision, but remember that there is also a limited window for you to plan for other critical goals like retirement and children’s education,” warns Rustagi.
A more realistic approach
Given the potential hit on their finances, homebuyers may have to be more pragmatic when they go house hunting. “The ‘ideal home’ should provide the convenience without the compromises, be affordable and have great resale value. Since that is an elusive dream, homebuyers should focus on one or two items on their wish-list,” advises Puri.
For instance, if you are a first time homebuyer, you can consider choosing a conveniently located starter home, which meets your requirement without burning through all your savings. “Homebuyers should buy what they can reasonably afford, in a project and location which will meet their needs for at least five to six years,” Puri adds. You can always trade up later when you can afford a better home. But given the state of the market, it would be unwise for homebuyers to have the investor attitude of selling the property and upgrading as quickly as possible. It is important to find a good middle-ground between utility and affordability.
Experts say the key to finding the right home is to set realistic expectations and be well informed. “Research well and keep yourself abreast of current market conditions before choosing a property. Make sure that you have a clear idea of property prices and rate of appreciation,” says Krishnan. As a rule of thumb, home loan EMI should not exceed 35-40% of your total income. In our survey, almost 28% of homebuyers indicated willingness to part with more than 50% of their household income towards EMIs, which can spell disaster.
“Get a clear and real understanding of your finances. Know how much you have in hand, what amount of loan you are eligible, and how much interest you will be paying,” says Shetty. Also remember to factor in the costs associated with buying a home. This includes transaction costs such as registration and stamp duty charges, brokerage, due diligence fees, transfer and mutation charges, documentation fee and the processing fees. “Don’t decide to take a bigger loan because you are due for an increment soon. You would be in a fix if the increment is lower than expected or if additional expenses crop up,” warns Shetty.
Having a clear set of priorities and a pragmatic approach should help you find the right home, no matter what your budget. “When looking to buy a home for your own use, if you find the right match and are financially ready, you must take the plunge,” Krishnan concludes.