Factors to consider before buying a house in 2023
Owning a house is one of the milestones we all want to reach in our lives. It is a decision that takes a lot of time, effort, and research. When you decide to buy a house, there are certain factors you should consider that will impact your current and future financial state.
The rapidly developing real estate market presents a wide range of choices for you to choose from. The aspects you should consider while buying a house can also be chaotic and tiresome. To make the process a little easier, here are the 7 key factors to consider before buying a house in 2023.
The golden rule
The 28/36 rule, which states that your home loan shouldn’t be more than 28% of your gross monthly income and your overall debt should be no more than 36%, is one of the simplest ways to determine your home-buying budget.
Another way to explain the 28/36 rule is by calculating the debt-to-income ratio. This rule is used by most financial institutions to determine the ability to repay your home loan once granted. Your debt-to-income ratio should be no more than 36% to be considered a good candidate for a home loan.
Let’s say your gross monthly income is Rs.1,00,000. At a debt-to-income ratio of 36%, your overall debt must be within Rs.36,000. Assuming you have another loan – this could be a credit card EMI for that flashy phone you got or a vehicle loan for which you are paying Rs.12,000 per month- your home loan cannot exceed Rs.24,000.
Take the emotions out of calculating expenses
Most people tend to overestimate their income and underestimate their needs when investing in an asset of their dreams. Naturally, this leads to the financial stress that then takes a toll on one’s emotional well-being. Therefore it is important to create a list of all your expenses including utility bills, EMIs, investments in mutual funds, SIPs, chits, taxes, groceries, shopping, education funds if you have any children, yearly travel budgets, and other likely expenses. Once you have all your expenses down, take a look and see if there are areas that you can improve upon.
Make changes to your budget so that you can invest the maximum in savings and pay off your credit card bills and loans that are still due before applying for a home loan.
The truth about rising incomes
On the income side, most people are optimistic about growth in their incomes. According to an Aon plc survey, salaries in India are predicted to climb by 10.4% in 2023 as opposed to a 10.6% annual rise thus far in 2022. The retail inflation rate as per RBI reports has been around 6%, but most consumers will agree that the real inflation seems much higher. Therefore the rise in income is likely to be largely offset by the rising inflation unless you are in a sun-rise industry and your personal skill sets are growing much faster than your peers – enabling you to outpace your peers in the income race.
The down payment
A down payment is a portion of the purchase price that you pay upfront, and the remaining amount is financed through the home loan. The size of the down payment you make can have a significant impact on the cost of your home and your monthly home loan payments. Having a larger down payment can demonstrate to lenders that you have the financial stability to make your home loan payments. A larger down payment will lower your monthly home loan payments, but it also means you’ll have less money available for other expenses.
Generally, banks will ask you to pay 20% of the purchase price in cash as a down payment but some might also consider 10% if your credit score is good with regular cash flow in your accounts. For instance, if you want to buy a house for 50,00,000, you would make a down payment of 20% or Rs 50,00,000 * 0.2 = Rs 10,00,000. The bank then would sanction you a loan of 40,00,000 and charge you a 1% processing fee for the loan which is 40,000.
Your down payment should only come from your savings, rather than from taking out a loan or using credit cards. If you arrange the down payment from external sources other than your savings, you’ll be left without any leverage in the future as you have to pay for the loan and also for the down payment eventually leading you to a financial crisis.
Finding the right property under your budget is the real challenge you might face while deciding to buy a house. The housing market is always changing and is flooded with different property offerings at different prices. Hence, it is important to study the market and understand the kind of property you want to buy as opposed to the property you can afford.
Properties that you can afford
Evaluate the present market status, make appropriate plans and be well-informed about the trends, costs, interest rates, and development that are currently prevalent. Compare various homes in the same locality and find out the pros and cons of each.
The prices of apartments start from 60 Lakhs and go all the way up to Rs.10 Crores. This depends largely on 2 factors – the location and size of the apartment. If your income permits you to buy a house under 1.5 crores, you could consider a stand-alone apartment in the more affordable locations of the city or in the peripheral areas which are not yet fully developed. If your budget exceeds 1.5 Cr, you could consider investing in the fast-growing western growth corridor of Hyderabad.
Keep in mind that you must choose a property where you can afford to reside and it must also exist in a growing residential area. If you aren’t very sure about deciding the budget, seek help from a financial advisor and learn about the market analysis, home loans, and other factors that are involved. Also, check all the documentation work and legal clearances of the property before buying it.
The best home loans
The best home loans in India vary based on an individual’s specific financial needs and circumstances. When choosing a home loan, it’s important to consider factors such as interest rate, repayment tenure, processing fees, and customer service. It’s also important to compare different options and choose the one that best meets your financial needs and goals. Below mentioned are some top banks with the best interest rates and services for house loans in India.
|Processing fee on loan amount
|0.5% and above
|Up to 1%
- SBI Home Loan: SBI offers attractive interest rates, flexible repayment options, and a large network of branches, making it a popular choice for home loan borrowers in India.
- ICICI Bank Home Loan: ICICI Bank is one of the largest private sector banks in India, offering home loans with competitive interest rates, flexible repayment options, and a quick and efficient loan disbursal process.
- HDFC Home Loan: HDFC is known for its customer-friendly policies and efficient loan disbursal process. It also offers a range of home loan products to suit different needs.
- Axis Bank Home Loan: Axis Bank offers a wide range of home loan products with competitive interest rates, flexible repayment options, and quick loan disbursal.
- LIC Housing Finance: LIC Housing Finance is a trusted name in the Indian home loan market, offering competitive interest rates and flexible repayment options.
Alternatives to home loan
In case it comes out that you aren’t eligible for any house loan because of a poor credit score or you just want to explore other financing options that could help you in buying a house, here are some listed below.
- Loan from private lenders
A private loan is a simple agreement between you and any individual or business lender in which the lender provides you with a significant amount of money against any secured asset. The security asset can be an option in case if the lender is a known mutual to you and is amongst your family and friends.
- Applying for government a house funding scheme
There are many housing schemes run by both state and central governments for simplifying the home-buying process for middle and lower-income groups in both rural and urban areas of Telangana. You can simply check out every individual scheme and you can also apply it online.
- Loan against assets
There are several alternate financing options available to buy a house with moderate to higher interest rates than the traditional house loan such as Fixed deposits (FDs), Gold loans, life insurance loans, mutual funds, equity shares, employee provident funds (PFs) and other. Find out here in more detail about everything.
The oft-ignored expenses
In addition to the home loan payments, you should be aware of the other costs that you are likely to incur. Most builders give a basic livable shell without furniture and luxury fixtures. But having invested in a dream home, you will want to furnish it well. A well-known interior design firm has been advertising 2 BHK interiors for Rs.3.5 Lakhs and your personal choice of the fit-outs may mean more or less in your furnishing budget.
Then there is the housewarming ceremony. After all, who doesn’t want to celebrate their new home with their loved ones? A typical family celebration involving catering, decoration, and an elaborate ritual may set you off by anywhere between Rs.75000 and Rs.2 lakhs even at a conservative level.
Your bank or home loan companies may insist that you buy an insurance cover for their loan in the event of your inability to pay.
These costs can dramatically increase your monthly spending, turning a house that on paper appeared to be a good deal into a costly one. Before deciding to purchase a home, estimate your expenses rationally and ensure that you are well within your budget.
Wishing you a happy home-owning experience!