As a home buyer, it is essential to ensure proper planning and managing your home buying budget before you make the decision to buy it.
As a home buyer, it is essential to ensure proper planning and managing your home buying budget before you make the decision to buy it. Purchasing a home is essentially one of the huge financial commitments in your life. Hence, knowing your budget and preparing for the expenditures is very important before starting the home buying process.
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.
Also read: Home Buying Guide – Part 06: Planning Your Budget
Calculate the additional expenses
While determining and managing the budget for the purchase of your property, consider the variety of hidden costs and the overheads that you may encounter in the home buying process. There are several additional expenses besides the purchase price of the property that also account for, such as stamp duty, registration fees, legal fees, brokerage fees, and cost of renovation or furnishing of the new property, among others.
These can put an extra cost on your budget and more if you are doing some serious redecoration work. Besides, in the case of an under-construction property, you should also consider at the time of booking, the gross pricing of the property. They involve external development charges (EDC), infrastructure development charges (IDC), preferential location charges (PLC), club membership if applicable, electricity and water connection charges, maintenance charges, and other applicable taxes. These additional costs can put an extra burden on your budget. It is recommended that you calculate these additional costs before arriving at the total cost of ownership of your home. 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 the 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:
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 a 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.
This plan is a combination of both construction-linked plan and down payment plan where the buyer pays 10 percent at the time of booking, depending on the developer’s payment scheme, and the remaining in a fixed time span linked to the progress of construction.
Pre-approved home loan
For a more accurate figure, pre-approval is an option that is available to know how much of a loan amount you can obtain. The best way to do that is to get a pre-approved home loan. This will help you in determining the budget for your home you are looking to buy.
Also read: Home Buying Guide – Part 01: An Overview
Finalizing the right home loan deal
There are various types of home loans available in the market for you. Depending on your financial standing, some of the home loan products allow you to qualify for a home loan.
It is recommended that you should know well in advance about the lending policies, all terms, and conditions of the lender before finalizing a home loan deal. Thus, the choice of a home loan provider and the decision to choose between a fixed or floating rate of interest become vital.
Insure your home loan
In case of an unforeseen misshapen or calamity, this would ensure financial protection to the dependent family members of the home loan customers. Under any such circumstances, the insurance companies would take care of the outstanding payments of the home loan. Therefore, you should get your home loan insured to protect your family from an unforeseen incidents or misshapen happen to you.
Managing the down payment
The size of the total acquisition cost of your home will also determine how much money you should have for the down payment and closing costs. If you are planning to buy a home by taking a home loan, you have to arrange for at least 20 percent of the cost of the property as down payment. It is recommended that you avoid taking a personal loan for the down payment as it comes with a heavy interest burden.
Therefore, you need to have extra savings before buying a home or you may liquidate some investments including your fixed deposits, ULIPs, mutual funds, and life insurance policies, among others for the down payment. Besides, you can also consider taking a loan against your PPF or life insurance policies or arrange it from your parents or relatives as a monetary gift. You should try to avoid withdrawing from your retirement funds such as PPF and EPF, however, you can consider taking a loan against your PPF or life insurance policies.
Maintain a contingency fund
So, before you start looking for a home, you will need to know how much you can actually spend. However, do not exhaust all money for buying your dream home. Besides, you must put some of the money on the table before buying a house and maintain a contingency fund in case of any unprecedented event.
Remember, under any circumstances, you must be able to pay off your monthly installments to avoid any kind of late payment charges. Make sure that the property you are planning to buy fulfills your present needs and at the same time you should be able to take care of your lifestyle and therefore keep it within your budget.