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Anand

Friday, September 10, 2010

Buying a Home

Buying a home is a dream for a majority of the salaried middle class people. It is something every dad tells his son when he goes to school to motivate him to study harder. Only if you study and get good grades, you’ll get a good job and only then you can buy a big house. The little boy nods his head and thinks of how big a house he wants to own and when the same boy lands in a job, his head starts working towards his goal of a dream home.

All of us have been through this phase of life and almost everyone owns a nice home or plans on owning one in the near future. That is why I thought lets write something on buying something as big and valuable as our home.

Things to do before buying a home:

1. Think long and hard. Include your life partner and maybe a close friend who you can trust with your life and have an open discussion. Buying a house is a long term financial commitment and should not be done in haste. (I am only talking about people who buy a home on bank loans)
2. Plan ahead – if you intend on buying a house in future, start saving for the initial down payment today. If you put aside a small amount let us say Rs. 10,000/- every month for 2 years you will have nearly 2.5 lacs at the end of 2 years and you can use it as the initial payment for your home. Remember – no bank is going to give you a loan for 100% of your home’s worth. They’ll give you only 85% or at max 90% of your property’s value. So you have to pay up the remaining and saving for that is a good idea.
3. Plan your finances – Check the probable EMI you may have to pay the bank once you get the loan, compare it with your net monthly expenditure, salary etc and make sure you can comfortably pay off your EMI. Ideally a person would require 60 - 70% of his salary to take care of his family and it is not a good idea to commit to an EMI that is more than 50% of your monthly salary.
4. Buy only what you need & can afford – many of us dream of a house with a huge garden, a nice car parking space, a road facing balcony etc etc but unfortunately in reality its something that remains a distant dream. We are forced to compromise on an apartment in most cases. I repeat - Buy only what you need and can afford. Do not give in to temptation and buy the apartment that would require you to pay the extra 5 or 10 thousand a month on EMI that you did not plan for. Settling for a smaller house is much better than not being able to pay the EMI or having to compromise on the standard of living.
5. Buy a house that you plan on living for at least the next decade. Do not buy a house thinking that, I will get a better one 4-5 years from now. Buying a house is a big decision and involves a lot of money (you’ll learn why in the later portion of this article) and its better done once or at most twice in a lifetime and it is not like buying a car every 3 or 4 years.
6. Do proper due diligence on the builder/real estate developer who is selling the properly. If the builders name is not very familiar inquire about them. In all probabilities someone in your own office may have had a good/bad experience with them. Either ways you get firsthand information reg. the builder before you sign the papers
7. Get quotations from 2 or 3 banks for home loan. Go with the bank that offers the best deal. Usually the cheapest interest rate bank isn’t always the best one to take the loan. Some banks offer much better service and lesser hidden costs at a fractionally higher rate of interest which is better than bad service and lots of hidden costs.


Is a house an asset?

For ages people are in a belief that a house is the best asset for any individual. Your dad and my dad would bet their heads off to make us believe so. Unfortunately I beg to differ slightly. Let us take a look at the below calculation before deciding.

Let us take myself as an example. I want to buy a Duplex house in a nice residential location in my hometown Chennai, which as per today’s market standards would cost me at least INR 50 to 60 lacs (2010 September) Assuming the house is 60 lacs and I put up 10 lacs from my pocket for the initial payment and get a home loan for the remaining 50 lacs below is how the math works out.

Loan Amount: INR 50,00,000/-
Approximate EMI per month: INR 50,000/-
Loan Tenure: 20 years

Total amount I will pay ABC Bank on my loan: INR 1,20,00,000 /-


If you see here, I am paying 1 crore and 20 lacs over a period of 20 years for a loan of 50 lacs that I got today for my house.

So, by 2030 if the cost of my property is not higher than 1.3 crores (remember I paid 10 lacs upfront for the house) by the end of 20 years, it would be the biggest blunder of my life. Paying 1.2 crores to the bank on a property that isn’t worth that much.

A further point to confuse everyone:

If I were to deposit this Rs. 50,000/- EMI I pay for the home loan every month in a bank deposit that pays me 7% per annum (Simple Interest), I will be left with more than Rs. 2.5 crores by the end of 20 years and if I were to put the same money in an equity oriented mutual fund that gives me 15% returns I will be left with a little over Rs. 7 crores by the end of 20 years

Will my house be worth more than 8 crores by the end of 20 years??? A serious point to ponder about!!!

Things to do after you buy a house?

There are a few things you can do to ease the burden of the home loan and to reap the full benefits of such a huge financial commitment.

1. Buy a pure term life insurance policy for the home loan amount – If I were to get a loan of Rs. 50 lacs I will definitely get a pure term life insurance policy for an equal amount and pledge it against the loan. So, in the unfortunate event of something happening to me, the bank won’t kick my family out of the house. Instead they will claim the balance amount from the insurance policy and pay the remaining to my wife and children. The last thing you want after our time is our family to be kicked out of our house. This is the MOST Important thing to do after or while you buy a house.
2. If you get surplus cash like an inheritance or a bonus from your company, use it to prepay your home loan. It will not only reduce your monthly EMI amount but also the loan tenure correspondingly.
3. Be on the watch out for great deals – once or twice a year banks usually advertise great home loan deals at throwaway interest rates. If you spot such a deal, do not hesitate; change your home loan providing bank. It involves a lot of paperwork and time but the rewards will be multifold. Let me explain with an example.

Assuming my existing loan with ABCD bank is @ 10% rate of interest and I see an advertisement from XYZ bank for a limited time offer 8.5% rate of interest, I rush to the bank and change the loan provider. This results in a saving of roughly Rs. 7000/- per month in EMI which if I put in a bank deposit earning me a 7% rate of interest would sum up to Rs. 35 lacs at the end of 20 years. Not small money my friends…

Conclusion:
I am not saying that don’t buy a house. Everyone needs a house and we deserve to live in a place that we own. Just be careful not to overspend or hurry up on a bad deal. Plan nicely and live peacefully.

Happy home buying!!!

7 comments:

  1. All I can say is wow. That is a lot of information. I wonder how long it took to come with an article that long. Thanks for sharing the "things to dos".

    Paula M

    ReplyDelete
  2. Nice article and thanks for sharing such a nice information.
    --Srivats

    ReplyDelete
  3. Hi Anand,

    Im sankar, 26 yrs, regular reader of your article. Before reading your article i was totally blank in mind regarding stock market,Insurance & Home loans.
    COnfused how to invest my money and which is the right place.
    After this wonderful article it made me to rethink my idea of investing in home loan at this age.

    Fantastic job dude..
    Keep posting articles more regularly..

    ReplyDelete
  4. hi,
    i have a plot in nollambur (chennai)...i want to construct a house this year..can u give me some information like what will be the total cost for constructing a 1000sqft house?

    ReplyDelete
  5. @ Pari

    The cost of construction differs based on state/city. I hope this place is in TN. With rising cost of iron, cement and river sand, the cost would come to atleast Rs. 1500 per sq feet of land you want to construct. You may be able to get a better idea if you contact a builder/architect.

    Also, note that this cost would vary based on the type of material you wish to use. using high quality material would cost you more than the above said amount.

    ReplyDelete
  6. excellent article, please suggest if a house cost rs 70 lakhs now, what will be the expected cost of that house after 10 yrs

    ReplyDelete
    Replies
    1. Sundeep - It is very hard to predict because the price of a home depends on a lot of factors like the type of house, where it is located, how far it is from various amenities etc. Plus, as years go by, depreciation sets in and your property may not be worth as much as a new property in that area.

      So, realistically your home could be worth about 1 crore or more in 10 years.

      Delete

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