Buying a starter home looks more achievable than ever.
Budget 2021 extended the tax sop available for affordable homes till 31st March 2022. Besides the usual deduction of up to Rs 2 lakh available on home loan interest payments for the year, affordable home buyers will get an additional deduction of up to Rs 1.5 lakh (Rs 3.5 lakh in all) on such payments.
Young professionals who have put in some years of service might be looking to move away from rented flats. There is a distinct advantage of owning a starter home, instead of staying on rent. For one, your monthly payment goes towards building up equity – that is the share of property that belongs to you. Few years down the line, you cash in on that equity by selling the house and upgrading to a bigger forever home. In a way, it lets you set your foot on the door in the realty market earlier than usual.
What is a starter home?
It is any entry-level home that a first time home buyer seeks to buy. It might be smaller in size or cheaper with fewer amenities and possibly in non-prime or suburban locations.
Affordable homes are in a way a starter home with its relatively smaller size – up to 90 sq m (968 sq feet) in non-metropolitan cities and 60 sq m (645 sq feet) in metropolitan cities. Moreover, there is a price ceiling of Rs 45 lakh in both cases.
Buying a starter home involves taking the following steps:
Buying a house is more of a marathon than a sprint. The fewer priorities you set, the more achievable it becomes. Instead of seeking a pool or a gym in the backyard, focus on the location. It is no use owning a swanky house that’s far away from work or doesn’t have good transportation or social infrastructures like schools and hospitals.
Imagine the social isolation you could face by staying in a locality away from friends and relatives. Also, future-proof your buying decision by not ignoring your requirements five to ten years down the line. For instance, a single or newly married might be currently happy staying in a locality brimming with nightlife but might seek proximity to good schools whenever they become a parent.
Don’t overshoot the budget
Remember that taking a house on rent is more affordable than buying it. That’s because rental yields are hardly 2-4% p.a of the market value of the property, while the interest rates on home loans are about 7-8% p.a.
However, while buying a starter home, ensure you don’t overstretch your budget. As a thumb rule, ensure your home loan EMI is not more than 35% of your take-home salary.
One should think of buying a starter home only when they have garnered sufficient down payment (at least 20% of property value) and have enough financial buffers.
Limit your expenses
There are different ways in which you can cut back on the overall budget. One is by choosing a house with lesser rooms than your forever house – for instance, one 1BHK instead of 2 BHK. Smaller rooms also mean lesser expenditure on its maintenance as well as it's up keeping.
Alternatively, you can opt for a second home instead of newly constructed flats. Often, the former goes for a lesser rate per square foot as compared to new homes. Also, monthly maintenance is usually lesser on such older properties. However, ensure you are not buying a badly maintained property that requires a lot of repair or which is too old. Otherwise, it will be difficult to sell.
Often, young professionals find it hard to own properties, especially in cities where prices keep rising. Owning a house today could mean reducing the house budget by 10% if its prices were to rise to that extent in a year or so.
One of the advantages of owning a starter house is that you benefit from its price appreciation from day one. This in turn could make it easier to fund your larger dream home in the locality.
Ensure you have an exit strategy in place. Perhaps you might be contemplating owning a 2 or 3 BHK over the next 10 years. In that case, work out the extent of finance you need to accumulate; preferably by floating a fund to hit the target.
As per current income tax rules, capital gains on sale of a home is not taxable if it is reinvested in another house within two years. Ensure you time it well and save on taxes.
Starter home doesn’t always possess all the pizzazz and glamour than you find in luxury homes. Keep it simple and upgrade to your dream home, whenever your finances permit.