Thursday, April 19, 2012

Road to buy your dream house!

Home is a place where you would like to unwind, relax and enjoy yourself. For most of us, buying a home is a lifetime achievement and buying a dream home is even a bigger one. Buying a house, more than being an emotional decision, is a major financial decision having long term financial impacts. Buying a house can be one of the most expensive expenditures of your life. Hence it is imperative that a thorough analysis of your personal, professional, health, risk attitude and financial situation, is carried out. A well worked out decision can save you from reflecting back on your decision every now and then.
Following are the various aspects which should be looked into before taking a decision
1.      Personal Aspects
a.   Life stage: Your life stage will define your requirements. A bachelor’s needs are different than a married couple or different than a retired couple. Older people might prefer a low maintenance house. Whereas families with growing kids may prefer greater floor space. Giving detailed thoughts about your needs and then translating them into written requirements can be a very helpful approach. A very important point to consider is futuristic requirements to be kept in mind and not to confine your analysis only to immediate needs. For example, if you are planning to increase your family in near future, then you should consider buying a slightly bigger house than what you may need currently.

b.   Single income vs. double income: If you plan to include your spouse income also then it needs a lot more deliberation than it appears. Availing loan based on double income may increase the total loan amount eligibility, and therefore a better house, but your loan repayment becomes critically dependent on both of your income. Consider situations where, due to a variety of reasons, one stream of income gets stalled then it will be very difficult to continue repayments. For example, your spouse wants to take a sabbatical for 2-3 years.

2.      Professional Aspects
a.   Stage of career: Your stage of career can also have a deep impact on your decision as it is directly responsible for your financials. If you happen to foresee any changes in future which can result in increased income then you can consider it in your calculations. However, you should be cautioned not to get too optimistic unless there is a 100% certainty about it.

b.   Salaried vs. self-employed: A salaried person may prefer equally distributed monthly payments to one time payment. Where as a self-employed person may prefer otherwise. The point which is highlighted here is that you should be clear of your income distribution. Regular stream can take care of monthly repayments and one time bonuses or equivalent can be used to prepay some principal amount. General guideline is to ensure EMI stays less than 40% of your monthly take home salary.

3.      Financial Aspects
a.   Budget for down payment: There may be a large amount, usually 15-20% of house cost, required to be paid by you initially. If you have budgeted any of your investments in equities/ NSC/ ULIP/ mutual funds/ real estate, then you should liquidate that well in advance. Depending on the nature of the investment, your liquidation planning should be done 6-8 months prior to your house search. Careful liquidation planning can result in higher ROI on your investments.

b.   Analyze cash flows: Cash flows can be a very useful tool to analyze your financial situation. Detailing out even minor aspects of monthly expenditure and income and identifying areas of expenditure cut-down can vastly improve the cash flows. It helps you prepare better to absorb changes in EMIs as and when that happens.

c.    Save for emergency fund: You should not be tempted to utilize all of your savings and income streams into buying a house. You should save and keep aside certain amount of savings as emergency fund. The understanding should be to use this amount strictly under any adverse situation only, and not to fulfill any other purchase. Buying a house or a buying a car or going on a vacation should be viewed outside this.

d.   Take adequate insurance: Buying a house by availing a loan increases overall financial liability by a significant amount in most cases. Increasing your insurance cover by a similar amount is a very good idea. A term insurance is generally an advisable solution. Also, you should plan and budget for insurance premium which can also be a good amount in a year. You should always have adequate insurance all the time. Absolutely don’t use your existing insurance to add to your kitty i.e. do not surrender any existing life insurance policies to get some quick money.

e.   Be vary of multiple loans: Too many loans, in general, is not a healthy situation to be in. Moreover it reduces your borrowing capacity for a new loan. You must analyze your existing loans and look for opportunities if you can close one before going ahead with the current house buying decision. This might mean postponing the house purchase but that is perfectly advisable. Keep in mind the point above i.e. total EMI should not exceed 40-45% of your monthly income.

f.     Plan for house doing up & registration: Planning for down payment and loan is necessary for house purchase but not sufficient. There is a need for registration & stamp duty on possession, amount of which may vary under different situations. Added to this is significant house doing-up amount which you may want to incur. The general advice here is to budget 10-12% of house cost for doing-up your house taking into account several aspects like wood work, electrical, alterations, kitchen etc.

It is better to be safe than sorry. Let house purchase be a completely confident decision on your part and not an impulsive one. A comprehensive analysis of your situation and planning your finances in detail can help you gain that confidence.