All people now agree that it's better to start early on the biggest investment such as buying home or plots at a younger age.
No longer must you wait until you're settled to start planning your home purchase. Countless young people now agree that it's better to start early on the biggest investment of their lives. Some want to buy a small house as an investment.
Buying a home early has benefits, you can spend a large part of your working life rent-free, or the house will appreciate over time. You can rent your home out for extra income. To buy a house at a young age, you must meet certain criteria. Here are some tips.
1. Be Financially Disciplined for Build Down-Payment
Financial discipline makes this dream house affordable. You must pay your own down payment of 10 to 25% of the property's market value. If a 2BHK costs Rs 80 lakh, the down-payment is between Rs 8 lakh and Rs 20 lakh.
To save for a down payment, cut costs, avoid wasteful spending, pay off debt, and increase your income.
2. Maintain Your Budget
How is your monthly income spent? Rent, groceries, restaurants, shopping, entertainment? Analyze. Categorize your spending and make a budget. In the digital age, manual labor is obsolete. Budgeting apps abound, you can track your spending by comparing income to expenses.
This can help you save for a down payment by reducing frivolous spending. Just trim your lifestyle costs, don't eliminate them. Cut your monthly restaurant visits from 10 to 5 or 6 to save money. Instead of buying 'branded' groceries for home cooking, consider 'house brands' or generic ones. Skipping expensive gym memberships to work out from home, taking public transportation to work, etc.
3. Research for Your Dream Home
Do you know the details of home ownership? Looking for an apartment, house, or condo? Number of bedrooms? What amenities are you willing to pay for? Within the city or on the outskirts?
All of the above affect the cost of home ownership. A outskirts home costs less per square foot than a city home. Knowing these additional details will help you save money. Set a budget that fits your current repayment capacity. Many buy a home they can't afford and struggle with EMIs.
4. Rather than merely saving, invest
Simply saving your extra income may not be enough. Invest. Let's compare options for clarity.
Maximum annual savings interest is 4%. A fixed deposit (FD) account earns 6% p.a. before tax. A recurring deposit (RD) account earns 7–8% p.a. before tax. Depending on the fund, mutual fund investments can yield 10% to 15% (or more).
FDs and RDs are risk-free because market fluctuations don't affect them. Mutual funds are risky and reliant on market conditions, but they can beat inflation over time. This can help you save for a house tomorrow. Inflation will raise tomorrow's home prices. Risk = reward. Due to fewer financial obligations, younger people can take more risks.
5. Plan and keep the Money for Future EMIs
Buying a home without a mortgage seems impossible. Mortgages are expensive. EMIs will likely be more than your current rent. Use an online EMI calculator to determine how much to save each month for your mortgage. Once you have a clear figure, you may want to start using your savings and investment returns to set aside that amount each month before you start paying EMIs. This will help you prepare for EMIs.
6. Plan for Additional Expenses
There are costs beyond the down payment. Stamp duty (from 6% to 7% of the property value), registration costs (at least 1%), memorandum of title deed fees (0.1%), interior decoration, electricity connection, water supply, etc. Brokerage fees, legal fees, home insurance, etc. Try to estimate all non-loan fees and plan accordingly.
7. Improve Your Credit Score
A good credit score (above 750) increases your negotiating power for lower interest rates. Due to the long duration of home loans, you pay much more in interest than the principal. You'll pay Rs 1.09 crore in interest if you borrow Rs 60 lakh for 30 years at 8.7% p.a. But if your credit score is low, you may pay more in interest. A loan at 10.5% will cost you Rs 1.97 crore in interest over 30 years.
Good credit can get you a lower interest rate. Pay your bills on time, don't apply for too many credit products, don't use more than 30% of your credit card limit, and correct credit report errors.
8. Comparing Home Loans
In addition to researching the type of home you want, compare home loans on third-party websites. Floating rate loans start at 8% p.a. and are pegged to the bank's MCLR (Marginal Cost of Funds Based Lending Rate). Fixed rates begin at 9%+ p.a.
Consider processing fees (0.25 to 1% of the loan amount), pre-closure fees (up to 5% on fixed-rate loans), and late payment fees. Comparing a home loan's components will reveal its true cost.
9. It’s Good Time to Buy a House now
The bank's MCLR determines floating rates. The MCLR is dynamic and changes in parallel with prevailing macroeconomic conditions. MCLR is influenced by the RBI's Repo Rate, which affects all loan and deposit rates in India. A rise in the Repo Rate may raise the MCLR and the home loan interest rate.
July 2022 marked the consecutive rate cut by the central bank. This has lowered some banks' MCLR, lowering home loan rates. If you apply for a mortgage today, it may be cheaper than a few months ago.
10. Tax Benefits
Mortgage interest is tax-deductible. You can claim up to Rs 2 lakh per year in home loan interest under Section 24 of the Income Tax Act. Section 80C lets you deduct up to Rs 1.5 lakh per year on repaid principal.
Buying a home isn't easy, but delaying may not be wise. Your income will rise, but so will your expenses due to more financial obligations. Be informed and good with money.