Home Buying Guide – Part 06: Planning Your Budget
As a property buyer, it is essential to ensure planning your budget before you make the decision to buy a property. You can decide on your budget and know exactly how much you can afford to invest in your property based on your own financial situation. Therefore, be clear about your budget before starting the home buying process.
A proper budget has to be planned to know how much money you can put aside each month after meeting your monthly expenses. Your budget for buying your home should be based on your household budget and how much money you can afford to pay as the EMI if you opt for a home loan. So, understanding your family’s present essential requirements in your budget will help you make the right decision. Review your current financial obligations such as loans, life insurance or any other commitments to see your true monthly income.
Consider the variety of hidden costs of buying a home. These can put an extra cost on your budget and more if you are doing some serious redecoration work. While determining the budget for the purchase of a ready-to-move-in property, there are several additional expenses besides the purchase price that also account for, such as: stamp duty, registration fees, legal fees, brokerage fees, property tax, cost of renovation/improving and cost of furnishing the property etc.
In some cases of newly constructed property, the developer/builder are not fully transparent at the time of booking with regards to the gross pricing of the property. The gross price should typically be a sum of the base price, external development charges (EDC), infrastructure development charges (IDC), preferential location charges (PLC), club membership if applicable, electricity and water connection charges, maintenance charges, and any other applicable taxes, etc.
Therefore, besides the EMI you should have a healthy savings account that can pay for these additional incidentals.
Understand Your Payment Plan
The payment pattern depends on the developer and the property type. In case of the ready-to-move-in property, a lump–sum amount is to be paid to buy the property. Once you’ve considered the down payment, make sure you’ve got enough to cover fees and closing costs.
However, if you are buying an under–construction property, you can opt for a payment plan of your convenience. Typically, there are three types of payment plans offered by developers for under-construction or newly-launched projects:
- Down Payment: Under down payment plan, a home-buyer needs to pay an upfront amount of around 20% of the property cost as the booking amount. However, there is no maximum limit you can pay as down payment. Therefore, try to pay the maximum amount you can afford to keep your interest pay-outs as lower as possible.
Thereafter, the buyer is required to pay the rest 75% within 45-60 days of booking and the remaining at the time of possession depending upon the developer. This payment plan is the most economical as the buyers get the maximum income tax benefits under it. Moreover, the developer also offers huge discounts to the buyers but the risks are also higher if there is delay in completion.
- Construction Linked Payment Plan: Under this plan, you just need to pay an initial booking amount of 10% upfront of the total cost of the apartment or a specific amount for the booking while the rest is linked to a set time-table construction milestones. The construction-linked plan has a relatively lower risk although it may be the most expensive.
- Flexi Plan:This plan is a combination of both construction-linked plan and down payment plan where the buyer pays 10 per cent at the time of booking and the remaining in a fixed time span linked to the progress of construction.
Fixing The Budget
For a more accurate figure, pre-approval is an option that is available to know how much of a loan amount you can obtain. Depending on your financial situation, some of our home loan products allow you to qualify for a home loan. The best way to do that is to get pre-approved for a mortgage. This will tell you the price range of the homes you should be looking at.
So, before you start looking for a home, you will need to know how much you can actually spend. You may need to put some of your own money on the table before you can buy a house. The size of your down payment will also determine how much you can afford. You must have cash for your down payment and closing costs. Make sure that the property you are planning to buy will fulfill your present needs and be within your budget.
Ajay Verma, founder, and writer of The Housing World, a real estate and mortgage news website. He has over fifteen years of rich experience in the above-mentioned industries.