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Owning a house of own is not just a dream but a desire of every individual. However, people are often confused regarding when they are financially ready to buy a house or what is the right time to buy a house!
Some people think that the more you delay the decision of buying a house, the more it becomes difficult buying it. So, it’s better to buy a house as soon as you can. Following the thought, several young professionals end up buying a house after just a few years into the job.
However financial experts do not support this thought!
Financial experts say, buying a house is a big decision, it should be a more calculative decision instead of an emotional decision! It cannot be taken instantly, but before buying a house you need to analyze, Are You are Financially Ready To Buy A House?
Let us see how you can analyze the fact!!
Are You Ready For The Down Payment Expense From Your Pocket?
People generally prefer taking a home loan whenever they plan to buy a house. Taking a home loan has two components, the first is the upfront down payment and the second is the equated monthly installment (EMI) you will be servicing later.
If you are taking a loan, then you should know that banks and financial institutions do not provide the entire amount of the loan. It ranges from bank to bank, but in no cases does the loan exceed 80-85 % of the value of the house. That means you will need about 15-20% of the value of the house as savings to make a down payment.
For example, let’s say you are planning to buy a house of Rs 1 crore. Then be ready to shell out around Rs 15-20 lakhs as a down payment from your pocket. Thus, do analyze and ensure, whether you are financially ready for the down payment part.
Check Your EMI Affordability!
Now second you must calculate that the monthly calculated EMI amount is affordable for your pocket!
Generally, lenders only give a loan so that the EMIs are not more than 40 percent of the borrower’s income. And this is for all the loans combined and not just the home loan.
Now let’s consider that the cost of the house you are planning to buy is Rs 1 crore, and you managed the down payment of 20 percent, i.e., Rs 20 lakh. Now you need a home loan of the remaining amount that is 80% i.e., Rs 80 lakh.
Assuming a loan tenure of 25 years (at 7.5 percent), the monthly EMI will be Rs 59,000. If your monthly income is Rs 1.2 lakh, then using the 40 percent loan rule, you can’t get a loan where the EMI is more than Rs 48,000. So, you will not be given Rs 96 lakh as a loan in this case.
Now in the situation, the lender can ask you either to increase the down payment or the loan tenure and in this case, both will get costly in your pocket.
Are You Financially Fit?
Financial experts say after you check the above two criteria, do evaluate your financial health and ensure that you are financially fit before you decide to buy a house.
Now how can it be decided whether you are financially fit or not?
This can be best analyzed by using the debt-to-income ratio. Ideally, experts say that A debt load of around 35% of your take-home income is considered ideal for a person. However generally in the case of a home loan this load increase up to 45-50% of your take-home income, and thus it directly hits your financial health.
This can be a problem, but if you have additional sources of income, for example, your spouse, the ratio can be higher.
Secondly, if you are planning to use all your savings to make a large down payment? Then please stop there! Don’t curb all your savings to pay the down payment, always keep some money for emergencies.
Salaried Person? Ensure You Have A Steady Job!
If you are salaried, ensure you have a steady job when taking a loan. If the home loan is of a long tenure, ensure that you do not retire before you finish servicing your loan.
It is of little use if you keep this uncertainty in your head. In all cases, you should look to prepay your loan much before its tenure gets over.
Do Not Ignore Other Important Goals!
Buying a house is a big goal but there are other important goals too, children’s education and retirement. After taking a home loan, you may land in a watertight situation initially and not consider these goals. But do not ignore these goals for the entire home loan tenure.
Thus, it is ideal to analyze before that how the Loan EMI is going to impact your investment for other goals, and I suggest deciding on taking a home loan accordingly!
Last Words!
Well, as soon an individual start investing, he is surrounded by the peer pressure of buying a home from their parents. They are more pressurized when they look at people around them or their colleagues buying a house.
However, you need to understand that buying a house is not a race. Some buy it early while others take time. And this is completely normal. Thus, I suggest deciding on buying a house only when you are sure about the above-discussed points!
You can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible. Keep reading our article and stay updated with the latest news about Mutual Funds!
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).