Decision to buy your dream home should be backed by sound Financial Planning rather being an Emotional Decision. One of my reader Mrs Sonali Patil (Name Changed) from Pune & her husband found themselves in deep financial trouble, just 3 months after buying an apartment in Pune through Home Loan from Public Sector Bank. Though both husband & wife are working but its a wrong notion that if husband and wife are working then they can manage the finances well after real estate purchase. She approached me for financial planning but it was too late. They bought house under family & peer pressure without proper financial planning.
Financial Planning is very critical specially if you are buying a house on Loan. I am listing down 8 points which are essential for proper financial planning before you buy your dream house.
1. Monthly Household Expenses:
For any middle class family in India, Buying a house is a huge financial stretch (They realize this after sometime). On other hand, considering high property prices no one can buy property without financial stretch. Based on my study of various cases, On an average you need to cut household expenses by minimum 25%-40% after buying a house through Home Loan. It is not an easy task as you are used to specific lifestyle. It is critical to keep aside atleast 6 months household expenses as a reserve to meet any future financial deficit. Reason, you & your family need some time to adjust to new lifestyle.
2. Loan Amount:
Currently banks provide Loan Amount = 80% of Property Value. If you are availing loan then you should be ready to contribute 20% of property value. This amount should not be raised through loan or debt. Ideally, it is advisable to contribute atleast 40% down payment from savings to reduce loan burden. Besides this don’t forget to take into account other costs like Stamp Duty and Registration cost, which constitute 5%-10% of total cost.
3. Next Six Months Liabilities:
It is important to make a list of next 6 months liabilities like kids tuition fees or Insurance Premiums. This amount should be kept reserve to fulfill these liabilities on time.
4. Existing Loans/Debts:
You should clear all your existing loans or debts like car loan, personal loans etc before buying a house on Home Loan. It is next to impossible to serve 2 loans simultaneously considering huge liability of Home Loan. Secondly by clearing these unsecured loans you will improve your CIBIL score before availing Home Loan.
5. Three Months EMI as Reserve:
Though it might be small amount considering the cost of house but it is important to keep 3 months EMI as reserve. This reserve will be handy, in case of any unforeseen circumstance you are unable to pay EMI on time. Any default on EMI can spoil your credit worthiness for future.
6. Budget for Interiors / House Furnishing:
Most of the people tend to overspend on House Furnishing/Interiors after property purchase. It’s a major expense item. It is critical to fix the budget for Interiors in advance and strictly stick to budget to avoid any future financial shocks. Kindly include budget for interiors during financial planning stage.
7. Regular Income Source:
In the absence of regular income source entire financial planning can go for a toss. If you are working in a sector which is impacted by recession then its a wise decision to postpone house purchase till you are sure of job stability.
8. Emergency Fund:
Last but not the least. Life is uncertain and no one can foresee unexpected expenditures like health expenses, family function, job loss etc. Financial Planning is incomplete till you have 6 months household expenditure in your emergency fund. You can invest this amount in short term financial instruments which can be easily liquidated like Bank FD’s, Mutual Funds etc.
I hope you liked this post. Buying your dream house should be pleasant experience rather financial nightmare. Above mentioned points will help in better financial planning and insulate you from uncertainties of life. Your suggestions and inputs are always welcome.
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