SMART SOCHO: 5 essential questions every home buyer needs to ask himself

Buying a home is arguably one of the single most important decisions in a person’s life. However, assessing its financial implications on his other key objectives like his children’s education, parent’s healthcare needs and his post-retirement agenda need to be carefully considered before going ahead with the purchase, writes Rajesh Kulkarni.

Is the worst over for the real estate industry? Seems like it. According to data compiled by various industry associations and private agencies, an increasing number of buyers are now firming up plans to buy property. In stark contrast to the situation even a year ago, when buying property was farthest from the minds of both buyers and investors, courtesy the galloping property prices and high interest rates among other things.

While property prices continue to remain high in most places, experts opine that the change in buyer sentiments has more to do with the recent interest rate cuts by the RBI and an increased optimism pertaining to their employment security and fiscal future.

It was this increased confidence in the overall economic scenario that prompted Dipesh Patel, a Mumbai-based mid-level IT professional with a software firm and his graphic designer wife Alpana, to plunge ahead with their dream of buying a home in the city recently.

However with average prices for a mid-sized home (approx 800-1,000 sq.ft) in the INR 1cr range, the Patel’s would be forced to a bank loan for approx INR 70 lakhs, even after encashing their entire investment portfolio valued at approx INR 30 lakhs.

Back of the envelope calculations reveal that a sum of INR 70 lakhs borrowed for a period of 20 years at roughly 10 percent would enforce a monthly outgo of nearly INR 70,000-73,000 from their combined monthly earning of about INR 1.2 lakhs p.m. The question that naturally arose was with the needs of a three-year-old son to take care of; did this huge debt burden make sense?

It’s a question that perplexes a majority of mid-income buyers hoping to buy their dream property, without compromising on the future economic security of their family. So what is the way out of this conundrum? Can a buyer compromise on the wellbeing of his family to secure his immediate need for a home?

The answer is definitely not easy and in most cases a potential buyer planning on taking a home loan to fund his purchase needs to ask himself a few very important questions prior to going forward with his decision to buy property.

According to industry experts despite the surge of optimism sweeping buyers, with property prices still beyond the reach of a majority of mid-income buyers and the recent rate cuts yet to make a significant impact on home loan rates, buyers need to introspect on whether it makes economic sense to shoulder the responsibility of repaying a huge home loan, opt for a smaller home, or perhaps invest in another city where the rates are more affordable.

For others saving more money to make a bigger down payment while staying in a rental premises is yet another scenario that may need careful consideration.

Can you bear the home-loan burden?
This is perhaps the most fundamental question that a potential borrower needs to ask himself. It’s no secret that a high EMI outgo can wreck havoc with the monthly household budget. Experts caution that a home loan EMI should never exceed more than 40 percent of a borrower’s net monthly income, assuming of course that he has no other loans or financial liabilities.

Also don’t get swayed by the recent cuts in interest rates. While they are a positive sign for the troubled realty industry, the impact on the monthly EMIs of a borrower is expected to be negligible at best.

Why buy, when you can rent
Renting is always a better option when funds are not readily available.  Are you really in a position to liquidate your investments, take on a huge loan debt, pay EMIs and also make an allocation for other expenses (stamp duty, registration charges), while struggling to take care of your family’s expenses? Ask yourself this question and pay heed to the answer.

Wouldn’t it make your life a lot easier if you leave your investments untouched, opt for a cheaper rental accommodation and use the interest you earn on your investments to cross-subsidise your rent?

What about the additional costs?
Don’t get fooled by advertisements that scream a low psf for a property. Always remember that what you see in such advertisements and on the telly is usually the base price. Its only when a buyer sits across from the builder that he reveals the long list of hidden charges.

A list that includes things like floor rise, legal costs, maintenance charges, stamp duty, registration, parking charges, clubhouse membership and so on. In most cases, these hidden costs will inflate the final cost that you will have to bear by as much as 20-30 percent, so make sure that you are well prepared to bear the brunt.

Property value v/s interest rates
In many cases, buyers take the home loan route to invest in the purchase of a property in the hope that they will sell it later and book a tidy profit. It’s a strategy that worked splendidly until about a decade ago, when property prices were soaring through the roof while home loans were available at about 7-8 percent.

Unfortunately the situation seems to be exact reverse today, with the already high property not expected to progress much further in light of the sluggish market, while in select markets like Noida and Gurgaon, prices have even declined in recent months. In simple terms, if you are paying 10 percent on a home loan, while the property price is only expected to increase by approx 5-6 percent, it’s a losing proposition.

Assess impact on other objectives
Each one of us dreams of buying our dream home and many go ahead and do exactly that. But while buying a long-term asset like a home is a credible achievement, it can have an adverse impact on a buyer’s other aspirations, if the financial implications are not contained.

For example, like it happened with the Patel’s, if the home loan EMI bites a huge chunk out of your monthly income, it could adversely impact your capability to provide for your child’s education, parent’s healthcare or even your post-retirement agenda.

In time the pressure to cope with the loan payments could well push your other important fiscal objectives out of your priority list. This is not to say that one should never buy a home, but do so only if and when you are absolutely sure that the decision will not impact your other goals in life.