Buying a house: Plan for additional costs

If you are planning to buy a house then you must keep yourself ready to open the Pandora box called ‘Cost of house’. Very likely everyone, the seller, the real estate agent or the builder, will tell you about the basic cost of the house only. But once you make up your mind or sign up for the deal, the nonstop demand for the additional costs can leave you frustrated. Therefore in order to avoid any rude shock of bearing these extra costs in future, it is better that you budget for them while planning for your house purchase.

Most of the additional cost are either percentage of the basic price or are calculated on per square foot area. Hence higher the area or the basic price, higher will be your additional costs. The various additional costs can increase your total outflow on the house purchase by 25% to 30%.

Your initial house cost = BSP (basic price per square foot) * Super area in square foot

The various other costs keep on adding to it as purchase process continues. Here is the list of such costs:

At the time of purchase of house property:

A. Down payment:

It is upfront payment to the builder while buying under construction or ready to move in property directly from the builder. It could be anywhere around 10-20% of the BSP.

B. Token money:

It is upfront payment when you are buying resale property. Ideally, It seals the deal stating the agreed upon purchase price and terms and conditions of the sale.

C. Loan

If you are applying for loan from banks then apart from EMIs (equated monthly installments) you will be required to pay the following charges.

1. Loan processing fee

Banks charge processing fees for every home loan application. It is a non refundable and used by banks to complete various formalities during the loan process which includes documentation, service charges etc. It may vary from bank to bank and is generally between 0.25% to 0.5% of the loan amount.

2. Other charges

It includes advocate’s charges for property search and the title investigation report, valuer’s fee for valuation report, stamp duty for loan agreement. The charges are generally on the actual basis.

2. Loan insurance charges and premium

Home loan is a financial burden. It is recommended that the loanee and co-loanee should get themselves insured against this liability. They can either take insurance directly from insurance company or can take home loan insurance along with the loan from the banks. Premium depends upon age of applicant, amount of insurance and additional benefits.

3. Prepayment or foreclosure charges

Pre-payment penalty on the floating rate loans has been abolished. Banks may charge only processing fee. Whereas on fixed rate loans it can vary from Nil to 2% of the outstanding loan amount, depending upon the lender.

D. Title and Valuation check

Once you have narrowed down the property, it is necessary to carry out a thorough search to verify all claims regarding the property. It includes encumbrance certificate, title deed, No objection certificates from various government authorities, other ownership documents, approved layout and building plans, background check of the builder or the society. There have incidents of same property being sold to different people. Hence it is always advisable to take professional legal help to verify and validate the documents.

The charges may differ depending upon the type of consulting service, type of property, city etc. It can be anywhere between Rs. 1000/- to Rs. 30,000/- and may be more in some cases.

E. Additional charges on infrastructure of the house

1. EDC: External development charges

Builder will add this cost to your basic price while calculating the total purchase price. It includes charges for creation of utilities, costs incurred in developing water and electricity supply, sewerage, roads, street lighting, community halls, etc. It is calculated on per square foot area. This may vary from Rs. 25/- to Rs. 150/- per square foot.

2. IDC: Internal development charges

Like EDC, IDC will also be part of your total purchase price and will be demanded at the time of payment. It includes charges for facilities inside the housing complex/ society like garden, internal roads, lifts, fire fighting equipments. It is calculated on per square foot area.

3. IFMS: Interest Free Maintenance security and CD (Contingency deposit)

Builders ask for this deposit to cover maintenance costs for initial years before RWA (Residents Welfare Association) is formed or take over the maintenance work upon itself.

Contingency deposit is demanded by the builder to cover any future price escalations like labour costs.

Both are refundable charges. It can vary between Rs.20/- to Rs. 100/-.

4. Car parking

If you want reserved car parking area allotted to you, you may be required to borne this one time charge. Mostly one car parking is mandatory with the apartments even if you may not wish to buy it. It may vary as per various parking options like open parking, covered parking or basement parking. It may vary from Rs. 50,000/- to Rs. 4,00,000/-.

5. One time club charges

If the housing complex is providing a community hall or club, you may be required to bear the charges. It is a one time charge for the building and equipments of the club. It can be some fixed amount decided by the builder or society. It may vary from Rs. 20,000/- to Rs. 2,00,000/- .

6. PLC: Preferential location charges

It can vary as per your choice of location of house with in the housing complex/ society. Some commonly preferred locations are Garden facing, higher or lower floors, Corner flat etc. To give you an idea, it can be anywhere between Rs.10/- to Rs. 200/- per square feet.

7. Utility connection charges

These are one time charges for utility connection like Gas connection, water, electricity meter connection. It varies as per the builder or society.

8. Cost of fittings and customization

It is usually possible in under construction properties. Outer layout of the house cannot be changed but sometimes builder can customize interiors for you like flooring or changing colour of tiles.

At the time of Registration of house property:

1. Stamp duty and Registration charges

Registration means registration of the documents of ownership with the government office. Unless the process is complete, you do not possess the full ownership of the property. And stamp duty is the tax to the government.

Registration charges could be 1% to 2% of the total value of property. And Stamp duty can be anywhere between 3% to 10% of the market value/circle rate of the property. In India different states levied different stamp duties. Also it will be different if the owner is male, female, joint or senior citizen.

2. Legal Fees

You will be needed to take services of a lawyer for registering the property in the court. Lawyer’s can charge anywhere between 0.25% to 1.5% of the value of property. They may also charge nominal fees for various documentations at times.  

Recurring charges after buying the house property:

The recurring charges after the possession of house will include:

1. Maintenance charges, usually on per square foot area basis.

2. Electricity charges, including both regular power supply from authorities and Generator Running by the society. It will be on the actual usage basis. The cost of power supply generated using DG or Generator by the society can be much higher than the regular power supply.

3. Other charges will include water and gas supply on the actual usage basis, monthly Club charges and yearly property tax.

Buying under construction house property:

1. Service tax

If you are buying under construction property from the builder, you are liable to pay service tax on the purchase price. It may range anywhere between 3.09% to 3.71% of the purchase price.

2. VAT

Recently Supreme Court has levied VAT on the under construction properties. VAT is over and above the service tax. It is very likely that builders will pass on this cost to buyers. It may be any where between 1% to 5% of the purchase price. More is yet to be made clear in this regard, hence it is advisable to ask the builder upfront about the charges and get it in writing.

Buying resale house property:

1. Transfer charges 

Builders and societies charge transfer charges when the original buyer wants to sell it to the third party. Such charges are to be borne by the seller but in several cases the seller tries to pass it on to the buyer. The charges could be anywhere between Rs.50/- to Rs. 1000/- per square foot.

2. Voluntary contribution or premium on transfer charges

If you are planning to buy house from co-operative societies then it will be advisable to check the list of their bylaws. They may sometime expect some voluntary contribution towards the society funds which can come as a surprise after the purchase.

Buying through a real estate agent:

            1. Brokerage + VAT

If you are taking services of a real estate agent, then you must ask for the brokerage and other charges upfront. They may charge any where between 1% to 2% of the purchase price excluding VAT.

During possession of the house property:

            If you plan to shift to the house after the purchase, you must plan to incur further costs.

1. Pure Shifting charges

Shifting charges depend upon the distance, amount and weight of load to be transferred, location of flat like higher or lower floors. Charges for intercity and intra city transfer will be different. You can choose for options like packing, loading, unloading, unpacking and rearranging. It may vary between Rs. 3000/- to Rs. 50,000/-.

            2. Fitments

To make your house livable some more after shifting costs become necessary like cable TV, Phone, internet connections, Electrical equipment fittings, gas connection. Overall they may cost you additional few thousand rupees.

            3. Interiors

Cost of interiors will depend upon the condition of the house and your needs. Many builders provide basic plumbing, flooring and painting. But other additions like wood work, window dressing, accessories for kitchen and bathrooms are to be borne by the buyer. Also if you plan to buy new furniture and home accessories, then it is advisable to budget for them in advance. If you plan to hire a professional interior designer, you need to plan for their fees too. The whole cost of interiors can add few lakhs to your house purchase budget.

Note: All the charges are indicative; you are advised to check the actual charges before taking any decision.

Finally:  Buying a house or investing in Real estate can be a big financial commitment for the buyer. It not only affects immediate financial resources but can also impact future financial resources. It is always advisable to look into all financial commitments as well as study the personal, professional, health, financial as well as psychological situation before committing yourself to such a purchase. Comprehensive Financial Planning exercise can help you understand your situation thoroughly. House Purchase or Real Estate planning is an integral part of Comprehensive Financial Planning exercise.

You may also like to read the following articles on house purchase, home loan and real estate investing.

http://shilpijohri.blogspot.com/2012/04/road-to-buy-your-dream-house.html

http://shilpijohri.blogspot.com/2012/04/tame-your-home-loan-strategies-to.html

http://shilpijohri.blogspot.com/2012/08/what-is-your-real-reason-for-investing.html

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.