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Eleven questions to ask before you buy a house!

1 August 2015

Eleven questions to ask before you buy a house!

Despite the surge in buyer sentiment, real estate is still not a good investment in most parts of the country. Property price are still very high and despite the recent interest rate cuts, the cost of borrowing has not come down significantly.

We have raised 10 questions that a potential buyer needs to answer before he takes the plunge. Don't get us wrong. We don't want to shatter your dreams to own a house. We just want you to take a reality check. Your answers will tell whether you are in a position to buy and if real estate is indeed the best investment option for you. If most of them are answered negative, take a step back and revisit your plans. You may decide to save more for a bigger down payment, buy a smaller house, invest in a cheaper city or not buy at all. Whichever option you choose, rest assured, you will not regret your decision.

Q.1. Can you afford the home loan EMI?

It might sound a no-brainer, but many home buyers get this wrong and bite off more than they can chew. The home loan EMI should be around 40% of your net household income. But that is if you don't have other loans. A high EMI outgo can put your household budget under pressure. If the home loan EMI accounts for more than 50% of the net household income, other goals will have to be downsized or junked altogether. Banks have their own methods of calculating your affordability.

If you go for a home loan, make sure you have enough room to wiggle in case the interest rate cycle takes an unexpected turn. If home loan rates go up, your EMI will not rise, but the lender will extend the tenure. But if the tenure extends beyond your retirement, the lender will have no choice but to increase the EMI. If your income does not support the increased EMI, the lender might ask you to make a part payment to reduce the EMI to fit your budget. So, make sure you don't take a loan that stretches your finances to their limits.

Also, while your income would certainly rise, but so would your expenses and financial commitments.A good chunk of the increment is nullified by inflation and increased consumption. As your children grow, their education costs and other expenses also rise. Your own lifestyle changes, which means the entire increment may not be available for paying the home loan EMI.

Q.2. Have you factored in the other costs?

Like many other products, a house also has additional costs that need to be paid for. The price advertised in the media is usually the base price of the property. There’s a lot of hidden until you sit down with your cheque book. Many builders will slip in charges for facilities that you thought were free with the property. There have been cases where builders have been dragged to court for charging extra for parking.

Not only these, there are other legal costs. The stamp duty and registration charges payable to the authorities add up a neat 7-8% to the overall price of the property. In all, these charges can collectively push up the property price by 20-25%. Make sure you have factored in these additional costs.

Q.3. Have you done a thorough rent versus buy analysis?

The high property prices across cities mean that renting is certainly a better option now. It may be argued that a house is an asset and any appreciation in its capital value adds to your wealth. That's true, but prices in Mumbai have either stagnated or risen marginally by 2-3% in the past one year. However, the real estate market is very localised and the situation may be different in other cities.

Q.4. Did you take a test drive?

What do you do when you aren’t certain to buy a house? Before you take the plunge, just calculate the home loan EMI you will have to pay every month. If you find it difficult to put away that amount every month, imagine your situation if you had actually bought the house. On the other hand, if you don't feel the pinch and all other goals have also been taken care of, go ahead and buy. In 12 months, you would have saved around Rs 6 lakh, which means a bigger downpayment. There are some fringe benefits as well: if you are putting away a big chunk into savings every month, it will prevent you from wasteful expenditure. This strategy won't work where asset prices are going up rapidly. If your chosen project becomes costlier by 10% by the time you decide to buy, you will have to pay more than you gain. But going by the current trend of prices, this is a remote possibility.

Q.5. Will the value of the property rise faster than the interest on loan?

In the early 2000s, it made eminent sense to invest in an upcoming apartment project since the home loans were available at 6-7% and property prices were galloping at 20-25%. Property prices are now appreciating at a slower pace. In some markets, such as Noida and Greater Noida in the National Capital Region, prices have even come down in the past 12-18 months. If you are buying property as an investment with a loan, first assess whether its price will appreciate at a rate higher than what you are paying on the loan.

Q.6. Will this purchase force you to postpone other major goals?

Stagnant property prices and high EMIs are not the only problems that potential home buyers should be aware of. Their home buying plans can have serious implications on other financial goals, such as saving for their children's education and marriage and their retirement.

If the home loan EMI is too big, it will push other goals out of the financial plan. Worse, buyers might have to liquidate existing investments to raise money for the down payment.Though parents are unlikely to surrender child insurance plans and education related investments, many other goals are easily sacrificed. Retirement planning is the most common victim.

It is easy for investors to raid their retirement savings to fund their real estate dreams. But even that can now be withdrawn for certain their real estate dreams. You can take loans from the Provident Fund for building or buying a house. Till recently, the NPS was an airtight investment that could be accessed only at 60.

Q.7. Do you have a contingency fund?

Real estate is not a liquid investment. You can't sell it at short notice, nor break it up into parts. One must have an emergency fund to take care of 3-6 months' expenses. If you plan to use your emergency funds to pay the downpayment, you could be making a big mistake. A financial emergency can put you in a terrible spot, with the home loan EMI inflame the problem.

To be fair, property can be used to raise loans in such emergencies. Several banks are offering home equity loans, top-up loans and overdraft facility which can unlock the value of property. But this is possible only if the property does not already have an outstanding loan against it. If you have just taken a home loan, there may not be enough room for a top up loan against the property.

When you buy a house, make sure you have enough investments in near-cash instruments that can be quickly accessed in an emergency. Also, don't touch this emergency fund even if you find it difficult pay the home loan EMI.

Q.8.Will you live there for 10-15 years?

Owning a home is seen as a sign of achievement and stability. However, buying a house too early in your career can hamper your prospects.

You tie yourself down to a location at a time when job opportunities are mushrooming across the country and even overseas. But that will also mean paying an EMI as well as rent. Can your pocket afford this double burden? The burden can be eased if you rent out your house when you relocate. But finding a reliable tenant and maintaining the property can be a pain. Property is not very liquid and finding a buyer at the right price can take weeks, even months. Plus, there are very high entry costs in the form of registration and transfer charges.Buy only if you are sure that you will live in the city for the next 10-15 years.

However, now things are very different. Property prices will certainly appreciate but not at the rate at which they galloped in the 1990s or even till the last decade. Also, the appreciation will not be uniform across locations.

Q.9. Will you be able to earn decent rent from your house?

Many investors in property are looking for two streams of income: capital gains from the rise in its value and rental income from the property. But don't get carried away when you calculate the potential rental income from your property. Many investors think that the future rental income will be enough to pay their EMIs. However, the rental yields (the annual rent received from the property as a percentage of the value) are very low in Indian cities.

Q.10.What if your income stops?

We have covered this aspect earlier but this is different from a short-term contingency plan. Have you factored in the possibility of something untoward happening to you? Apart from covering their basic needs and future expenses, you must also take an insurance cover equal to cover all outstanding loans, especially the big-ticket home loan for the property. Avoid insurance covers that are linked to the home loan and progressively come down as you repay the loan.They might appear cheaper but a simple term plan that covers your life for a fixed amount is best for this purpose.

Q.11.Will the builder deliver in time so that you don't lose tax benefits?

Delayed projects are no longer news. According to PropEquity, the average delay in the Mumbai Metropolitan Region is 25 months. In the worst hit Delhi NCR region, it is 33 months. Delays can be particularly debilitating if the buyer had expected EMIs to replace the monthly rent payment. If the project gets delayed, they have to fork out money for both. Even those who buy property purely as an investment are hit. They are paying EMIs but there is no sign of rental incom

Our advice to buyers: Buy from builders who have a good reputation and are likely to deliver within the promised deadline. Even then, factor in a 10-12 month delay into your planning when you book a house.