Having an own house is a dream or better say a goal to be necessarily accomplished, by almost every human being residing on this earth. As per older generations, a house of own is the biggest investment of one’s life, but if you have ever have noticed, you will realize that nowadays prefer most to live in rent than buying a house of their own, and while they live in a rented house they save money to buy their house.
Here the question is how much one should accumulate to buy a house, what will be strategies to save money for your house while paying the rent and other expenses, and what is the right time when you are financially prepared to buy a house?
Well, let us find the answer to this question, through the following discussions-
Where Does One Stay?
People who live in cities for their work, generally prefer to stay in a rented house, that too close to their workplace, which means at least 30-40% of their take-home salary would be spent on paying rent. Most of the young men and women find a house max 10 km away from their workplace and end up paying high rent. Well, this much high rent is not a big deal for those whose initial salary starts with a six-figure number.
What Should Be Preferred- Rent or Buy?
A large section of people living in cities, prefer living in a rented house, only some of them think about buying a house, depending on how fast their incomes rise, and events like marriages accelerates their thought of buying a house because after marriage most of the people prefer to get stable, before the birth of their first child.
Well, people have confusion about whether to stay on rent or buy? It is always advisable to buy a house only when you have reached a stable financial position. Let us do some calculations, if you plan to buy a 2-BHK apartment in an area that is not entirely out of the city, then it would approximately cost around 60 lakhs, and may go up to crores if you find a better place.
You May Have to Take A Home Loan!
Accumulating 60 lakh to buy a house, would take at least 5 years, for workers who have a post-tax income of Rs 12 lakhs, but it may take 10 years or more than that, for a worker with normal income say 5 to 7 lakhs per annum.
Well, in this situation people mostly look for taking a home loan as the best option, to buy a house of their own. Most home loans for a 15-20 years duration come with an interest rate between 8%-10%, after paying a down payment of at least 20% to the total home price, that is if calculated, a 2BHK flat worth Rs 60 lakhs, would cost a down payment of Rs 12 lakhs. The rest amount that is Rs 48 lakhs, will be paid in the EMI form per month. The EMI amount stands to be about 1% of the loan amount, which would come to about Rs 48,000-50,000, in most cases.
Can You Afford The EMI?
Well, this is a big and prominent question, can you afford the EMI? If you look at the EMI figure, you can observe that this EMI amount would cost you around 40-50% of your take-home salary, either singly or jointly. Basically, don’t become emotional while planning to buy a house, be practical and don’t forget this calculation.
What’s the Point?
People when to feel that they can pay this EMI amount, with their income, they soon start planning to buy a house. It is always advisable, decide to buy a house, only when you attain a strong financial position and not when your income allows you to pay you the EMI amount. This is so because paying off the loan amount along with other monthly expenses can derail your financial flow, with unexpected events such as job loss, medical emergencies, or more.
How to Decide A Strong Financial Position?
The very first thing that decides your strong financial position if you are planning to buy a house is, having an emergency fund, and second, have financial assets which are at least 2x that of the home down-payment, or about 40%-50% of the total cost of the home.
So basically, if you are planning to pay a down payment of Rs 12 lakh, then have at least 24 lakhs in financial assets, such as in mutual fund investments. Equity mutual funds are likely to get you there fastest especially if you start early enough.
Why 2x Of Down-Payment?
Buying a house with a loan, means a debt to be paid monthly for long-term, which means no extra expense can adjust in your income. In this situation, the high income of a person doesn’t judge his financial position rather, high financial net worth making him the master of his own fate.
Also, people do take many increments and reward during their work, but their present situation doesn’t decide their future position, it might happen that many of us might not have our jobs all the time, well in that situation it would become difficult to carry out the loan amount and monthly expenses together, but if you have financial asset in the form of mutual fund investment, that too double of your down payment amount can help you cater the problems occurred due to unexpected events.
Your plan to buy your own house should be a pleasant feeling for you and not a cause for stress full life, so basically, just wait a little longer, build up your finances and then buy your dream home, worry-free.
You can contact us at Shri Ashutosh Securities Pvt Ltd., for more details, we are here to help you in any way possible.
(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 to future returns).