Buying a property is a big step for a common man. How to plan and buy a house property in India?
It becomes even tougher for people buying their first property.
Not many people know the steps involved in buying a house property in India.
The procedure is particularly lengthy & complicated when purchasing is done using home loans.
But why people resort of home loans in property investment?
Real estate property investment is very capital intensive.
Means, one time investment in property is very high.
One can buy mutual fund units with only on Rs.500.
But to buy even a small property, capital requirement can be in lakhs of rupees.
This is the reason why most people keep deferring their house-buying decisions.
But this delay only proves more costly with passage of time.
Buying a house property is a priority which is unavoidable.
This is why, the earlier one takes the buy decision, the better it is be for ones personal finance.
In this post I will share some tips about buying a house property in India.
These are no expert advice, but more of a layman’s understanding of the whole process (steps involved) in buying a house property.
For common men, buying a house property is one of the costliest purchase they will indulge in life.
Considering the amount of money that exchange hands here, it is better to know beforehand, all the steps involved in buying a house property.
So let us see few logical steps that a first time investor can follow while buying a house property:
Step #1. Why you want to buy a house property.
Answer this question first before doing anything.
One can buy a property for two reasons:
- (a) for self-use or
- (b) for investment (rent out).
If objective of property purchase is investment, then its location can vary.
One may not buy the property in the same city as he/she is residing.
One can live in one city and buy a home in other city.
The selection of city can be based on potential one can earn in form of rental yield and/or capital appreciation.
Hence, the choice for a house property widens considerably when need is investment.
If property is required for self-occupation, then the selection criteria will change.
Hence, it is essential to first answer this important question that, house property is required for self-occupation or investment. .
Step #2. What is the costliest house you can afford
This is very important step in buying a house property in India.
Most people only do a rough calculation at this stage.
In order to buy a best house for self, it is important to exactly know ones affordability.
The question that needs an answering here is, how much maximum EMI you can pay.
Rule of thumb says, EMI should not be more than 40% of ones monthly take-home salary.
If ones take home salary is say Rs.50,000 per month.
It means, maximum EMI that can be paid is Rs.20,000 per month.
Now let’s do some back calculation.
EMI of Rs.20,000 per month in India means, loan amount of close to Rs.20,00,000.
In order to get a home loan of Rs.20,00,000, ones self-contribution (20%) should be at least Rs.500,000.
So adding up home loan amount and self-contribution, a person earning Rs.50,000 can afford a house of Rs.25,00,000.
Step #3. What are your preferred locations
How to finalise the location?
For a family, finalising a location is a not as difficult.
Their hands are tied hence they are not left with many option.
In terms of location, the house property must be closer to:
- Shopping center &
- Public transport connectivity.
Experts say that for a family requiring house property for self-occupation, location gets limited with a radius of 8-10 kilometers of the school or office.
In metro cities of India, this radius may get extend to 15-20 kilometers.
Step #4. How soon the possession is required?
Once the location is finalized, the second important question that needs answering is, how long you can wait for the possession of house?
In open market there are properties available which are:
- (a) ready possession &
- (b) under construction property
In India, compared to the soaring demand, ready possession properties are less in numbers.
Hence they are very expensive. But such properties has advantage of offering immediate occupation.
Under construction properties are more affordable.
But on the downside, it takes time to get its possession.
In India, an under construction property takes 2 to 3 years to get ready.
If the construction gets delayed, the possession time can further slip.
There is a mix of benefits and drawbacks between ‘ready possession’ property & ‘under construction’ property.
If one can afford, people can start with identifying good ready possession house property.
But if ready possession properties comes out to be expensive, one can opt for under construction properties.
Step #5. How many payments to be made before possession of house property
Location and type of property plays a very vital role in the property costing.
Hence it becomes a must to finalize these parameters first.
In case of ‘ready to move’ property the owner will agree for payment terms in just 2 steps.
- (a) First, will be the booking amount plus self-contribution &
- (b) Second, will be the balance amount financed as home loan.
In case of under construction property, the payment to builder (step b) can further gets spread.
Banks will pay the builder on basis of construction milestones achieved.
Step #6. Arrange for the self-contribution
For common men, this is probably the most important step to buy a house property.
If the down payment is properly managed, it can save lots of money for the buyer.
How to manage down payment?
We know that the house properties are very capital intensive.
In India as per regulation, 20% funding of house property must be done from self-contribution.
The balance 80% can be arranged from home loan offered by banks.
The 20% self-contribution itself can be a big amount.
In a typical Indian city like Bangalore, a 2BHK property may cost close to Rs.60 Lakhs.
Twenty percent (20%) of Rs.60 lakhs will be Rs.12 lakhs.
For an average middle class Indian, arranging Rs.12 lakhs is also not easy.
These days people buy their first property between 30 to 40 years of age.
So this is the age when people will need funds for making down payment of their house property.
But arranging Rs.12 lakhs on the D-day will be nearly impossible.
So it is essential for person to plan for this down payment very early.
This is the reason why, experts’ advice young people to start accumulating funds from the day they start earning money.
In India, a person start working from age of 22-25 years.
If one has 10 years in hand, arranging Rs.12 lakhs for down payment for house property is easier.
One must start investing money from this young age. Suppose a person is of 25 years of age.
He starts investing in mutual fund though a SIP.
Simple by putting Rs.4,000 each month in SIP for 10 years, one can build Rs.12 lakhs.
Step #7. Apply for home loan
You will note that arranging for home loan is step 7 and not step 1.
Generally we start the procedure of buying a house property from this step.
People first apply for home loan and then simultaneously search for house property.
As stated in step 6 above, the procedure of house purchase must start 10 years back.
But majority fail to plan for their house property in this way.
As a result, while their home loan is getting approved, only then they realise about the need of arranging for the down payment.
Not only this, all steps starting from first to last gets executed only at this time.
You can imagine, the biggest purchase of life, also becomes the most unplanned of all.
Here I will only suggest that, as far as possible people must go for SBI or other government banks for home loan. Why?
- Firstly, these banks offer cheaper loans.
- Secondly, government bank’s criteria for legal and technical verification of property is strict.
In case hoax developers or property agents are trying to sell an illegal property, techno-legal team of these government banks will catch them.
A government bank may take longer time to approve a home loan, but it is worth a wait.
This is a very important step as far as purchase of property is concerned.
Focus of person should be on getting the cheapest loan from best of banks.
In India, people buy house property for varied reasons.
Out of all the reasons one thing is sure that majority do not plan their purchase properly.
I have seen people buying property to avail home loan to get tax rebates.
People also buy house property in attraction of earning a rental income.
There is also large group of people who gets attracted towards house property when home loan interest rates come down.
Though it may sound justified, but these are not the reason for which one must buy a house property in India.
People must buy house property when one is ready for it.
Once readiness is dependent on the seven steps that we have discussed in this blog post.
If any one step (between 1 to 7) remains incomplete, means the person is not ready for house purchase.