Buying home

If you are thinking of buying a house, here's an essential five-point guide to reach that goal

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When are you buying a house? That's often the first question that well-meaning friends and relatives pose to young people who've just married or started on their first job. While it's okay to buy one house to live, buying a house as an investment is often a poor decision. Unlike in developed countries, residential homes in India yield very low rent. Even in the metros, rental yields (annual rent as a proportion of market price) seldom go beyond 2 or 3 per cent. Most people wrongly believe that property markets can earn them big capital appreciation. Their belief is based on what they hear from friends, who tell them that their property has appreciated 30 times in 50 years. It is only when you convert that into annualised returns that you realise it's a 7 per cent return. Once you factor in the 10 per cent interest you'll pay on your home loan, the 'return' is often in the red.

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The property market in India has traditionally been loaded against the buyer, with very little accountability from the developer on delivery times and the quality of construction. Issues around municipal regulations, land titles, etc., can also come back to bite you. Selling the property at the time and price of your choice is no joke as real-estate transactions tend to freeze up during downturns. Recent attempts by the government to crack down on black money in real estate and to enforce regulations on developers through the RERA (Real Estate Regulation Act) also suggest the times for super-normal returns from property investments may be behind us.

But if you're thinking of owning a roof over your head, here are Value Research's tips to get to that goal.

One, borrowing to buy a home can be the biggest financial decision you make. Therefore, ensure that you only borrow what you can afford to repay. A simple thumb rule would be to make sure that your home loan EMI doesn't exceed 30 per cent of your current income. While calculating your loan requirement, don't forget to include stamp duty, costs payable to the municipality and the cost of doing up the interiors. If your 'dream' home far exceeds this budget, downsize your dream!

Two, money for the down payment, typically about 20 per cent of your purchase price, is often your biggest stumbling block to buying a home when the time is right. Therefore, if you are planning to buy a house, begin to invest towards the down payment at least five years in advance. Target saving up at least 25 per cent of the purchase price of your house. When arriving at this number, don't forget to account for inflation in property prices.

Three, if you have five plus years to buy a house, you can consider a good multi-cap fund to save towards down payment. If you have a shorter time frame in mind, hybrid-fund categories such as aggressive hybrid, conservative hybrid or equity-savings funds are good vehicles in which to invest towards your down payment. Choose from these three categories based on your risk appetite. If you absolutely cannot afford to fall short in five years, equity-savings funds may be your best bet. Given that markets are at elevated levels today, SIPs in these funds would be a better bet than lump-sum investments.

Four, make location your top consideration in choosing a home. It is a good idea to make sure that you and your partner have settled down in your careers and decided on the city you want to live in, before buying your first home. This is because renting a residence and also paying an EMI on another can cost you very dear. Location is also a big determinant of the returns you stand to make on your property investment, be it rental income, capital appreciation or the ability to find buyers, in case you decide to sell your home at a later date.

Five, get a plain term-insurance plan online, which covers your outstanding loan as soon as you take a home loan. In the event of an unfortunate event, your spouse or nominee will receive a death benefit equal to the outstanding loan amount, freeing them from the burden of EMIs.

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