Always keep contingency fund separately to meet unforseen circumstances like a sudden job loss and on healthcare emergencies
After their daughter was born, the Modis wanted to buy a property of their own. No more rent business, they said. They searched the best of the neighbourhoods. Like every other decision in their lives, they decided to stick to their Rs 45 lakh budget. That was the max. Three weeks later after days of incessant search, they came across their ‘dream’ house. It even had a small patio – just as they had imagined.
The cost was a bit on the higher side at Rs 63 lakh. The Modis started looking elsewhere. A month later after lots of calculation and going back and forth, they signed on the dotted line for the same property at a discounted price of Rs 60 lakh. Does the story sound familiar? You bet it does. The Modis may be content with their decision but experts beg to differ. Biting more than you can chew is a cardinal sin. Here's how.
End of fairytale
The Modis are not an isolated case. There are many like them. A bigger house is always better or that’s what our minds tell us.
So what if we have to stretch our budget a little? Our salaries will grow and take care of the EMIs (equated monthly installment). All the big things in the world were a result of courage...blah blah. These are some of the little motivating speeches we give to ourselves. In our hearts, we know greed just got the better of us.
The expert advice is to control our desires. Select what you can really afford! “Do not take impetuous decisions while selecting property. Never select a house that will put more financial burden on you than you can afford in your present circumstances. Do not indulge in wishful thinking and assume promotions and appraisals down the years will help you tide in the payments,” says Destimoney Advisors, chief executive officer, Brijesh Parnami.
In case you are married, it’s usually seen that couples who go beyond their means to purchase a home do so when either the husband or the wife influences the other completely. Unlike the mythical tale, here even Adam can tell Eve to eat the apple! So, what argument to give in case your spouse is coaxing you to buy that house, which is really going to strain your finances? Simple. Ask him/her these questions. Do live from paycheck to paycheck?
Do we have some cushion money in our account to fall back upon? Will we be left with at least three months’ of payment equivalent money even after making the down payment? If the answer is no for two questions, you know what not to do.
A costly mistake
Some people buy a house, and do not immediately realise the liabilities it will bring. While the incomes of a working couple boost their chance of getting a higher loan, the same income levels need to be maintained through the tenure of the loan. If not, all hell breaks loose. They end up forfeiting the buy, and this harms their credit score. Unforeseen events and exigencies can happen to anybody. One needs to be careful and always have a Plan B. Make sure there is a contingency fund such as an FD that can be encashed in emergency or a PPF fund that can be relied upon in case an unfortunate incident like a pink slip happens. These emergency funds can come in the form of life insurance deposits, FDs, or mutual funds that you have invested in.
Size does matter – but not all that much. “If you are in the position to buy a 2 BHK in a good area today, you can be assured that it will appreciate in value.
Assuming that you expect your income to grow steadily as well, you will always be able to upgrade to a bigger home in a few years.
The appreciating nature of well-chosen property also means that waiting until you can make that hefty down-payment on a larger home may not work simply because the prices for such homes would also have increased,” says Arvind Jain, managing director, Pride Group.
The discerning buyer must decide whether it’s a home purchase or a property investment.
Experts say home purchase and property investment are two separate concepts. A home is one of the things we buy because we intend to put them to use and make our lives more secure and comfortable.
An investment property is something we buy in order to sell it at a sizable profit a few years down the line, and to rent it out until then. Homeowners view their homes as a source of stability and security, while investors see their holdings as tradable commodities. And if it’s your home, be doubly sure about it. Don’t pull your finances so much that it falls off!
Don't kid yourself
The argument put forth by many who end up buying a bigger than they originally had planned is: our children will need more room. Truth be told, your children sir need more than room: they need more money. While it’s true that children may benefit from some extra space in the house, what’s better is having money to help your children through college or MBA or engineering/medicine.
“Being able to afford a really nice family vacation each year is a great thing. Remember your income is fixed. Having that bit of extra money to pay for the important things your children will surely start asking for as they grow older as opposed to a fatter mortgage is something one should consider deeply.
Purchasing a house you can easily afford can mean the difference between having extra money for your children’s changing needs and being unable to afford much of anything inside that dream house,” says Salil Shah, a financial advisor.
What’s the point in having that dream house if that’s the only dream you can pursue after buying it? That is the question you need to ask yourself before you end up buying that costly house, he signs off.
