Don’t Buy A House You Can’t Afford

Your dream home can quickly turn into a financial nightmare if you don’t take a pragmatic approach and rein in your aspirations.
– Sanket Dhanorkar

If money was no object, where would you live? Would you choose a cosy private villa complete with a garden, far away from the bustle of the city, or a swanky condo in an upscale township? Even if you have sensible ideas about the kind of home you can afford, glossy advertisements with overedited pictures will tempt you into going for a home that is a little, if not well out of your budget.

Everyone’s idea of a dream home may be different, but since money is an object for most, these aspirations should be toned down accordingly. However, most homebuyers stretch their finances when they take the plunge. Read on to find out how to prevent the roof over your head from becoming a burden on your finances.

Dream House Or Money Pit?

Experts say the aspirations of potential homebuyers have undergone a sea-change over the years. “For buyers, especially millennials, it is no longer about just owning a house or purchasing the biggest property they can afford. Homes have become a means of self-expression,” says Adhil Shetty, CEO, BankBazaar.com. Buying the dream home can be a very expensive affair, yet homebuyers are not averse to stretching their savings to the limit to make it happen. Since banks do not lend more than 80-85% of the value of the property, at the outset, the buyer has to shell out a lump sum as down payment of the house. Most end up taking a large chunk out of their life savings to make this payment and secure the home loan.

An ET Wealth survey found that one out of every three Indian homebuyer is sinking in more than 50% of his total savings into the downpayment itself.

An analysis by ArthaYantra shows the time required to accumulate the corpus for the initial down payment across major cities is quite high—at an assumed annual savings rate of 25%, homebuyers in Mumbai will need 12 years to save up the adequate amount, while those in Delhi and Chennai will need seven years. But this is only the beginning since what follows is committing to a large monthly outgo as EMI.

But it’s not enough to have the savings to cover the initial payment and manage the EMI outgo since swanky homes come with a host of ancillary costs to budget for. First, you will have to shell out a higher amount as property tax and home insurance premium. Second, upscale housing complexes that offer luxuries like a clubhouse, garden area and tennis court can demand ₹8,000-10,000 as society maintenance charges. Third, a bigger home means you will spend more on the upkeep. Fourth, a fancy new place is also likely to set the tone for a more expensive lifestyle for you and your family.

“If you move into an upscale neighbourhood, you will be influenced to change your lifestyle as well, but your income and savings profile will not change overnight,” says Hemant Rustagi, CEO, Wiseinvest Advisors. Doing up the interiors to match the impressive exterior can also set you back by a significant amount.

Getting Value For Money

At the outset, get rid of any illusions you have about being able to sell the property whenever you need to and get full value for the asset. Real estate is not high on liquidity and the current market is enough proof of how difficult it is for sellers to find a buyer at a desirable price.

“In the premium housing segment in particular, liquidity can be scarce, since what is aspirational for you may not be the same for others,” says Rustagi.

Further, banking on a rise in the value of the property in the future can haunt you. It would be unwise to commit to a high-ticket home loan based on this expectation. The current real estate market is not ideal for investment. Another problem that plagues those who have bought under-construction homes is extensive delays in handover. The tax deduction on housing loan interest payment in such cases is restricted to ₹30,000 per year, not ₹2 lakh as allowed for fully constructed properties.

For most middle-class families, even if they can overcome other difficulties, buying a home involves some compromises. Most stretch their budget to buy a bigger home than they can actually afford, in a locations that convey a superior sense of social ‘arrival’ but doesn’t necessarily offer a better lifestyle.

Perhaps the biggest price homebuyers pay for their aspirations is the impact it has on other financial goals. A bigger home can eat into your household income and savings forcing you to compromise on other aspects of your family’s life. You may think you can rebuild your savings in the future, but compounding needs time to work its magic—the later you start saving, the less power it will have.

Buying a house you can easily afford can make a difference to your financial life. Suppose you stretch your budget and take a home loan of ₹75 lakh for 20 years at 8.5% interest. Your EMI will come to ₹65,087, eating up ₹81.2 lakh in interest payments over the lifetime of the loan. But if you go for a smaller home with a loan of ₹50 lakh, you will pay an EMI of ₹43,391, shelling out ₹54.14 lakh in interest over the next 20 years. The monthly savings of ₹22,000, if put into a diversified equity fund, can yield ₹49 lakh over the next 10 years at an expected return of 12%.

Committing to a large EMI will leave you with little money for other goals or to meet contingencies. “For many, buying their own house is an important, once-in-a-lifetime decision, but remember that there is also a limited window for you to plan for other critical goals like retirement and children’s education,” warns Rustagi.

A More Realistic Approach

If you are a first time homebuyer, you can choose a conveniently located starter home which meets your requirement without impacting your savings too much. You can always trade later when you can afford a better home, analysts aver.

Experts say the key to finding the right home is to set realistic expectations and be well informed.

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