Buying a new home for the very first time? It is a matter of great excitement and expectation. We think of a cosy little home and dream about it. Typically young couples are buyers of first homes today. The new home also symbolizes a new life.
Most of these young people need the help of outside financing to attain their goal of buying their first house. But not to fear, there are multiple options available today to finance your dreams. But there are a lot of things to sort out. What should be the location of your new home? What should be your home’s size? What is your budget? Once these questions are answered you can look forward to looking for your dream home.
You should be financially and mentally prepared to take on the responsibility that comes with being a home owner before you take the step of buying a first home. It is definitely not a cake walk!
Budget and location
Location of your dream home should be of paramount importance. The first step towards budgeting for your new home is to select the location of your new home. You might get a very good bargain in the price of your home, but it may entail large recurring costs towards living expenses, for example markets may be too inadequate and highly priced, conveyance costs may be huge, doctors and daily helps may be scarce.
All these factors are equally important in deciding on your budget, as these costs would kick in as soon as you move into your home. This would definitely impact your loan repayment. If living costs escalate then it will curb your living standard.
Matching budget to expectation
Your dream may not always match with harsh reality. You must be aware of your budget, which is how much you can afford. Do you want a larger home in a locality further from the city or a smaller place closer to work and school? Are you comfortable with a condo or do you want a smaller flat or even a small house. Once this is addressed you can move forward into the next phase.
First time buyers often prefer to buy under construction properties which are cheaper. But you must be aware of the promoter’s reputation and past history of delivery. Late possession can lead to large losses as you pay both EMI and rent. The tax deductions on the EMI also kick in only once the possession is complete. To overcome this issue, you may buy on a staggered EMI option, where the EMI starts on possession.
Financing your first home
It is imperative that you have a substantial nest egg to pay for your down payment. 20% of the total cost of the home is generally the down payment required. Also the EMI you pay should not exceed 40% of your income. This will ensure that you are comfortable in payment schedules and you day to day life is not strained due to loan repayment. This is why your budget should be in accordance with your present day income, not in anticipation of your future income.
There will be a good amount needed to pay the registration fees, other taxes, mutation bills, broker fees, electricity and water installation, maintenance deposit and other sundry bills as soon as possession is complete. These are not included in the home loan and should be separately budgeted for. Do not fall in the trap of under budgeting for these extengencies.
Then do not forget that there is a cost of finishing, painting and furnishing your ream home. Be realistic and budget with all this in mind. Matching your immediate future needs with available budget is of prime importance. If you are a young couple living alone then a two bedroom flat should suffice to house you and your children. But if you have parents who would be living with you it might be smarted move to have three bedrooms to accommodate future children.
Choosing the right home loan
There are different types of interest rates for different banks. There are fixed rate loans, where interest rates are fixed at the beginning of the term. Flexible rate loans are as the name denotes market linked interest rates which change as per market fluctuations.
These days fixed-floating loans are catching the fancy of home buyers as they have a fixed rate for the first couple of years and then are open to market fluctuations. In the coming years interest rates are set to weaken in most economies, so these loans are very attractive.
NBFC’s and private lending companies, mortgage loans are other options one may consider as an option. They are new entrants in the market and may offer a more attractive term of loan.
Please do keep in mind that there are discounted rates available at most banks for women. Avail of these schemes to get a lower rate of interest. Even a 0.5% lower rate can save you lakhs while repaying your home loan.
In all circumstances do negotiate. Most lenders are open to negotiation if your credit history is good and your CIBIL scores are over 750. So before thinking of buying your home, do strengthen your and your partner’s credit rating!
Prepayment and tenure
Last but not the least, do consider your tenure of payment is very important. You may want to have a short tenure and be free from the grind of EMIs fast, or you may want to stretch it out to deal with repayments comfortably. It is a major decision. Do remember that prepaying your home loan has no penalties now. So it may be more feasible to secure a longer tenure, enjoy tax deductions and prepay as and when you are able to do so.