Buying a house is one of the Most Important and Biggest Decisions that you may ever make in your life. It has huge implications on your finances, and can make or break you.
There is always a holy war between the buy vs rent lobbies, when it comes to housing. I'm a "buy" advocate, specially when you are buying a house for the first time. Finance apart, the idea of owning my house gives a kick out of me.
Once you buy a house, it is for you and your posterity for ever (unless you get in to any kind of a financial mess because of it). You can protect yourself and family with a roof above your head. You are not at the mercy of a land lord. You are protected from rental inflation. Once the house is paid for, you are protected from any changes in interest rates also.
Timing wise I think this is the best time to buy a house. Here's why:
In the current situation, I feel that the house prices have bottomed out to a large extent (in India), there's not much scope for any more reduction.
The overall improved sentiment from the US Fed Reserve , points to the beginning of an economic recovery in the US atleast by 1st quarter of 2010. (This despite the discouraging unemployment rate numbers in the US). Like it or not, the Indian sentiment is directly tied to the US recovery (although we are not technically in a recession).
Any signs that the US economy is recovering, is very likely to heat up all our down beat markets (stocks, jobs, real-estate etc.,). It's better to buy your home in a down beat economy (now) than in a overheated economy (that is likely in 2010).
In addition , the Indian Government has also introduced some fiscal stimulus measures, to kick start our economy.
The housing loan interest rates by banks are also very competitive now. I don't expect it to stay low for too long. When the economy heats up, interest rates tend to rise.
Hence you can save a lot of money by going for a housing loan and leveraging on low interest rates now. This will which directly translates to low EMI payments atleast for the first few years.
Recently SBI started this (low) interest rates war by offering loans of Rs. 5 lakhs at 8% p.a for 5 years and cutting 50 - 75 basis points (i.e reduce interest by 0.5 to 0.75%) for loans from Rs. 30 lakhs to Rs. 50 lakhs. Other banks are feeling the pressure and following suit. As a smart customer, leverage it.
| For floating rate home loans for amount of Rs 30 Lakhs to Rs 50 Lakhs. | ||||
| 1st year (%) | 2nd Year (%) | 3rd Year (%) | 4th year onwards (%) | |
| HDFC | 9.00 | 9.00 | 9.00 | 9.00 |
| SBI | 8.00 | 8.50 | 8.50 | PL-275bps |
| ICICI | 9.75 | 9.75 | 9.75 | 9.75 |
Before you take a plunge note the following:
(A) Make sure to exercise due-diligence on the property you want to buy and the price you are willing and able to pay. Don't get carried away by the sales pitch of legitimate or illegitimate housing companies. Know and get all the paper work and ensure they are originals. Get a legal opinion without fail. Get multiple opinions from experts. Satisfy yourself, that what you are paying for is reasonable market prices (do comparisons, market research, peer checks of prevailing market rates), the property exists, it is legally being sold, free from encumbrance, and the seller is legit.
Reputed builders are safer but not guarantees. They can take your money and keep you waiting for months if not years, before they deliver the project.
Understand that buying a property is both an art and science. Hence your emotions and intellect should both play a crucial role in the selection of a property.
If you are careless, you can get cheated big time and very easily.
(B)Ensure that you can afford the housing loan. First take stock of how much down payment you can afford. More the merrier (say atleast 25%).
Banks will do their due-diligence, on your affordability of the housing loan and the property itself, even before granting you a loan. You shouldn't however be counting on the banks to do it all for you. After all, banks are in the business of making money out of you (as interest on the loan). If you aren't careful and lose money on the property or lose the property itself, the bank will come after you anyway for the loans.
A rule of thumb is that a housing loan shouldn't exceed any more than 2.5 times your annual gross salary. The EMI should not be more than 25% of your take home pay. Shorter the duration of the loan, the better. If for example you make Rs. 5 Lakhs an year, the ideal bank loan is Rs. 12.5 Lakhs (worst case Rs. 15 Lakhs - which is 3 times your annual gross).
(C) Read the Fine Print: Don't get carried away by the interest rates alone. Look critically at all hidden costs. Some of the banks charge 1% processing fee, some mandate some form of insurance etc., Understand any prepayment penalties (ideally none to 2%). Most banks don't offer fixed interest rates now, but you may want to compare them with floating rates (if available). Know that most fixed rates are not truly fixed rates in the sense that the banks can under circumstances still increase the interest rates.
(D) Don't count on tax breaks on housing loan interest as an incentive for taking a housing loan. Although the tax breaks exist today, to the tune of Rs. 1.5 Lakhs, in the proposed new tax code the Government is planning to do away with that tax break. The party is coming to an end.
Good luck with your Housing decision, and let me know your comments.
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