What happens when you get a job with a good package? Or receive an awesome hike in salary? Or receive a lump sum as retirement package from the employer? A default advice from friends /relatives would be to buy a home. For some this could be a first home which involves a lot of emotions behind such decisions or others may see it as an investment opportunity.
But more often than not, these decisions are marred by mindless assessment of one’s financial situation, understanding of markets and wrong estimation. Moreover, the emotional factor behind first home purchase creates more chaos in one’s personal finance which definitely needs to be consulted with a financial planner.
Home is not a product which you buy from a mall by swiping your card and get over it. However, innovative schemes offered by real estate providers nowadays makes it look like it and lures a common man towards making a decision, adding to it are the freebies and offers like pay 1% and book the flat, interest payment by builder, discount on loans, free car etc. make the buyer take the decision quicker than expected.
But the reality of this can be different and may cause both financial and mental suffering to the buyer. Some of them could be lack of savings post servicing the EMI’s which may result in not having a corpus for long term term goals. It may cause severe issues if there is a break in job or a job loss.
Before planning for a home purchase one needs to understand the stage of life, income and savings level, impact of buying vs renting a home, tax benefit impact of buying a home and then decide when and what type of home they should plan to buy. So let’s check out these aspects briefly and see how it can help you take a right decision –
1) Life’s stage
Life’s stage is an essential factor when you wish to buy a home. If you belong to an age bracket of 25-33 years, married or not, the inclination towards not buying a home should be more. At this age you are at an early stage or yet to be established in your profession . There could be needs like shifting to multiple cities due to job requirement, the cash flows could variate as you may want to get married, so settling down would take another 3-4 years for you and hence committing a hefty amount for EMI every month could be a difficult. For a couple expecting a kid within a year should wait for another 3-4 years before they buy a home. As an average middle class household, addition of a new member can cost an additional amount of INR 10,000 – INR 20,000 per month from their cash flows as the newborn would need dedicated funds. Buyers from the age group of 33 years or more (married with kids) should assess their cash flows i.e. Income vs savings factor to make an informed decision.
2) Income vs savings
There are some thumb rules to follow which help in deciding a home purchase. First, the down payment should not be done via taking a loan (hand or personal) . This indicates that the decision was made in haste and no proper savings were done for the home purchase. Second, the loan EMI should not exceed 40% of monthly income, you should be left with some funds to plan for other things . Third, the savings ( Income – Expenses( including the EMI)) should be at least 25% of monthly income. Fourth, the funds for registration and interiors ( which is often ignored by the buyer) should be available by the time possession is made.
3) Buy vs Rent
Home is an asset which does not give any income and costs every month. To understand the complete cost of the home purchase one should assess the buy vs rent factor of home purchase.Though renting is convenient but it does not give the sense of ownership. An average working class Indian attach his/her pride with their home and consider it as a symbol of being settled in life irrespective of the fact that the very decision can unsettle his/her finances in longer run. Home is an immovable property, so if your work demands working in different cities or the nature of the job market is volatile one should opt for a rented home and avoid buying one. Rent vs buy can be also in terms of rent vs the EMI for the home. The difference between these two should be the deciding factor for the home purchase.
4) Tax Benefit
Home purchase is also used as a tool to save taxes, especially for those who are in 30% tax slab. As per the prevailing income tax rules one can claim upto INR 2 lakhs of tax deduction under Section 24 B but doing so they are ready to forgo the HRA benefit which was claimed on the rent which has been paid. In some cases the tax exemption under HRA is more than INR 2 lakhs which sometimes makes buying a home a costly affair in tax perspective also.
