How to get your finances in place to buy a house

Sarthak is a 35-year-old architecture consultant in Delhi. Having moved from a small town, he and his wife are considering buying a house now that his income is stable and he expects to stay in Delhi for the foreseeable future. This is an huge financial decision which will have repercussions on Sarthak’s money situation for years. He wants to make sure that the financial aspects of acquiring the house are dealt with smoothly.

Sarthak must be sure that he’s financially ready to make the long-term commitment that buying a house entails. It may require him to change his spending and saving habits, at least in the immediate future. To make the change as comfortable as possible, he must first decide a budget for the house that he is looking for. This will depend upon the level of EMI obligation that he will be able to service. Drawing up a household budget that will consider his expanded income in the future, inflation as well as higher expenses as his family grows, is an efficient way of doing this.

The other immediate requirement that he must be ready for financially will be the down payment that he will be expected to make by housing finance companies at 15% to 20%of the cost of the house. Sarthak must arrange this sum from the savings and investments that he has made over the years. It is important for Sarthak to find the balance between taking on a commitment that will put too much pressure on his income and going that extra mile in cutting back on expenses to acquire an appreciating asset. The house that he is considering must be adequate to meet his family’s living requirements for at least 8-10 years and he must be willing to stretch to make that happen. On the other hand, he must be wary about going beyond the budget too because he will also have to fund other costs related to the acquisition such as the broker charges, stamp duty and registration fees as well as expenses related to furnishing the house. Any overrun on the budget will put pressure on his income now and in the future.

Once Sarthak has fixed his budget, he must shop around for good loan terms and get a prior loan approval so that he does not lose out on his preferred home just because the finances were not in place. He must look for options in structuring the loan which will suit him, such as step-up loans which will allow him to pay higher EMIs later in the loan tenure when his income is higher. Similarly, he must start liquidating his investments that are going to fund the down payment and move the money into liquid investments that he can easily access without any delay or loss in value. Doing all this will ensure that Sarthak is ready to deal with this milestone in his financial life.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.

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