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What you should consider before buying a home

Living under-a-roof that you own is a dream come true. Some also see it as an investment. However, how prepared are you to buy one? Read on to find out.

Living under-a-roof that you own is a dream come true. Some also see it as an investment. However, how prepared are you to buy one? Read on to find out.

Affordability check

Before buying a house, work on a budget. A big mistake that people make is to think that loan eligibility amount declared by banks is the true barometer of their repaying ability. This, though, is not ideal.

A popular thumb rule is to ensure the EMI is not more than 1/4th of your take-home salary. For instance, if you earn Rs 1 lakh a month, EMI should not be more than Rs 25,000 a month.

While your finances are likely to improve with increase in income, avoid taking step-up EMIs (where EMIs increase over the years). It entails higher financial risk.

Once you arrive at a budget, shop around for the location that fits the bill. While choosing a location, also factor in the travel costs, proximity to work, school, and near-and-dear ones. Moreover, buy a house only if you are going to live in the city for the long-term. 

Also remember to have an emergency fund in place before you go for a purchase decision.

Improve your credit score

Higher the credit score, lower would be the interest rate on the home loan. If your credit score is not good (lower than 550 on a scale of 300-900), look at ways to improve it. Avoid taking too much debt at a time. If there are multiple loans, ensure some are paid back fully. 

If a borrower uses over 30 percent of his credit taking limit, it negatively impacts the score. So does a delay or default in repayment of loans and credit card dues. Fully repay the credit card dues and not just the minimum payment. 

Pro tip: Holding on to an old card with a good credit history helps.

Keep in mind that it takes at least six months for improvements to reflect on the score.

The right thumb rules

1. Do not buy a house unless you have 20 percent of its value to make as down payment. If you don’t have it, start a house fund. Invest systematically into a mix of equity and debt mutual funds. Once you hit the target, start hunting.

2.  Do not take a loan of more than 15 years. While it will reduce EMI and improve affordability, it is not financially prudent. Why? The interest payments outgo is too much beyond a point. For instance, EMI for an Rs 25 lakh loan at 8.4 percent is Rs 30,863 for a 10-year loan, 24,472 for a 15-year loan and Rs 21,538 for a 20-year loan. It reduces only to Rs 19,962 and Rs 19,046 for 25 and 30 years respectively. For every five extra years of loan taken, EMI falls sub-optimally beyond 15 years.

While your finances are likely to improve with increase in income, avoid taking step-up EMIs (where EMIs increase over the years). It entails higher financial risk.

Fully utilise the tax benefit

Budget 2019 has improved the tax benefit for home loan takers. Interest paid on home loan qualifies for a tax deduction up to Rs 2 lakh in a financial year. And if stamp value of your property is less than Rs 45 lakh, it increases to Rs 3.5 lakh. Moreover, principal payment (including stamp duty and registration fees) up to Rs 1.5 lakh qualifies for Sec 80 C benefits. Earning couples can jointly avail them by registering the property in both their names, which in turn lowers their effective rate of borrowing.

In a Nutshell 

By not over-stretching your budget, following thumb rules and availing tax benefits you stand a better change of owning your dream home.

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