If you are looking to buy a house, this could be a good time to take the plunge. Property prices have risen steadily in the past one year and home loan rates have gone up following the flurry of repo rate hikes this year. But though this has impacted affordability, analysts say the pent up demand is likely to push home prices up further in the coming months. “The performance of the broader economy and changed buyer perceptions have a greater bearing on market momentum as they dictate homebuyer income levels and demand much more directly,” says Shishir Baijal, CMD, Knight Frank India. Here is a checklist that buyers should keep in mind when they plan what could arguably be the single largest purchase in their life.
Though real estate portals make it look like child’s play, zeroing in on the right property can take several weeks of intense research. So, it’s a good idea to get a preapproved loan even as you are searching for your dream house. Lenders give an in-principle approval to the loan on the basis of the income and repayment capacity of the borrower. “A pre-approved loan is useful because if the bank is ready to disburse cash, you can be tougher in negotiations with the seller,” says Raj Khosla, Managing Director of MyMoneyMantra. A loan aggregator can help you find the cheapest loan. But be careful not to make too many home loan enquiries. “Loan enquiries are reported to the credit bureaus for verification of the individual’s credit score. Too many enquiries imply that the person is credit hungry and could downgrade your credit score,” warns Khosla.
The Real Estate Regulation Act (RERA) is a landmark legislation that protects the rights of the buyer and punishes the developer for delays, defects in structure and other shortcomings. RERA ensures timely delivery by preventing the builder from channelising funds to other projects. Check if the project is registered under RERA. However, though all states except Nagaland have implemented RERA, not all projects may be covered by the legislation. Also, don’t depend solely on RERA certification. Experts say the provisions of the law are not airtight and the enforcement mechanism tends to be manipulated and misused by builders. Many homebuyers who have got judgments passed in their favour are not able to get the orders implemented. That is why you need to do your due diligence about the status of approvals and permissions and the title of the property. In case you are buying property on resale, it’s always a good idea to hire a property lawyer and pay a small fee for the scrutiny of the property ownership papers.
One big dilemma for buyers is whether to pay more for a ready-to-move-in flat or book an under-construction house at a lower price. Though costlier, ready to move-in homes remove any uncertainty of delays. You get immediate possession of the house, move into a new house and stop paying rent. If bought for investment, it starts generating rental income immediately. On the other hand, under construction property is 15-20% cheaper than a ready flat. But there is also the uncertainty of delays. However, if you have done your due diligence and bought a RERA registered property from a reputed builder, that uncertainty is taken care of.
You might find this unbelievable, but a lot of people don’t know how much area they are buying when they book a flat. Builders try to hoodwink buyers by touting the super area of the project. But this super area includes the common facilities such as the lobby, elevators, staircases and corridors which are used by all residents. These facilities can account for up to 20-25% of the super area quoted by the builder. The built-up area is the area covered by a house. This also includes the area that gets covered by walls and storage places. What an owner actually gets to use is the carpet area, which can be 60-65% of the super area. Make sure you know the carpet area of the property. As per the law, builders are required to provide the break-up of the super built-up area and the carpet area.
When buying a house on a loan, take time to assess whether you can afford the EMI. Many people get emotional while buying property and overstretch their finances. Ideally, your loan to income ratio should be below 35%. This means, all your existing and the planned loan EMIs should not add up to more than 35% of your net monthly income. In some cases, this can go up to 40-45%, but going beyond 50% is a route map to disaster. Lenders keep this in mind when they extend you a loan, but further borrowing from other sources can push up the overall liability of the individual. Also, buying a house for self occupation is different from buying one as an investment. The former is a good idea because it builds an asset and frees you from the recurring expense of rent.The latter may not be such a good idea because you may end up paying 6-7% interest on the loan for an asset that may not grow at the same pace. “If you are buying for self use, go right ahead. But if buying a second or third house for the purpose of investment, think thrice before you take the decision,” says Sanjay Agarwal, Head, Retail Assets Business of Edelweiss ARC. Investing in a second or third house made sense when prices were galloping at 20-25% in the early 2000s.Now, property prices may not rise faster than the cost of the home loan. It’s also a good idea to go for as short a loan tenure as possible. If that’s not immediately possible, make it a point to increase the EMI amount every year in line with an increase in your income. Increasing the EMI amount can bring down the tenure dramatically. A 5% increase in the EMI every year will reduce the tenure of a 20-year loan by more than eight years. Increasing it by 10% every year would end the loan in less than 10 years.
Given the rise in home loan rates in recent months, many home loan customers may be considering loans at a fixed rate rather than a floating rate. Fixed rate loans are costlier than floating rate loans by almost 100-150 basis points, but they don’t change. The prevailing rate for floating rate loans is about 7-7.5%, while fixed rate loans charge 7.9-8.5%. Understand the features of the fixed rate loan before you sign up. Many fixed rate loans are fixed only for a couple of years before they switch to a floating rate.
With almost 60-70% of the value of the property funded by a loan, you need to be ready for unforeseen circumstances. Buy a term insurance cover equal to the loan amount so that your family is not saddled with unaffordable debt if something happens to you. When the pandemic was raging, there were numerous cases where the sole breadwinner of a family passed away, leaving the dependents with a heavy liability. “Lenders do look at such cases with sympathy, but loans cannot be waived,” says Agarwal of Edelweiss ARC. Lenders usually push a reducing cover term plan when they give a loan. But a regular term plan is a better way to cover this liability. It can continue even after the loan is repaid or if you switch to another lender. Moreover, insurance policies linked to a loan are usually single premium plans. These are not as cost effective as regular payment plans. A term insurance plan of Rs.50 lakh will not cost a 35-year old more than Rs.700-800 a month, while a 40-year old will pay about Rs.1,000 per month. This cover should be over and above what you might have planned as a replacement of your income.
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