5 Questions to ask before buying a house property

Things to consider before purchasing a house property

Introduction

We Indians tend to attach a emotional value to buying things like gold, house property, etc. Also, it is considered mandatory in Indian society to own at least one house property. However, while fulfilling these societal obligations, we often tend to forget to think practically and stick to our financial planning. Let us discuss 5 things that one should consider before buying any house property.

5 Questions to ask before buying a house property

1. Can you afford the home loan EMI?

• If you are planning to buy a house property on loan, the first thing that should be considered is it really worth to take a home loan that would have an EMI of ~50-60% of your take home salary.
• We suggest that ideally one should consider buying a house property on loan only if the household expenses including EMI account for 50-55% of your take home salary. The reason behind keeping this cap of 50-55% will be explained in this blog in later part.
  • For example, if your salary in hand is INR 1,00,000 per month, then your household expenses including EMI should not exceed INR 50,000 – 55,000.
• If the household expenses and EMI exceed beyond this limit, it would end up compromising other long term financial goals and will disturb the financial planning.

2. Will this purchase force you to postpone your other major financial goals.

• Other major financial goals include children education, retirement , etc. Many people in their 20s-30s might feel that planning for retirement is too early.
• However, the more you postpone planning for these major goals, more investment would be required to fulfill these goals in the future.
• Thus, if you are compromising your future financial goals for home loan EMIs then it might be detrimental for your financial planning.

3. Do you have a contingency fund?

• For a salaried individual, it is suggested to keep aside minimum 6 months of monthly expenses as a contingency/emergency fund. For a self-employed individual, contingency fund should consist of monthly expenses of at least 12 months.
• Monthly expenses here should include everything from EMIs and SIPs to household expenses.
• These contingency funds come in handy during financial and medical emergencies like COVID-19 pandemic.
• Thus, before buying a house property, one should make sure that he/she has this contingency fund in place and also this fund should not be compensated for the sake of buying the property.

4. What if your income stops?

• Job losses during tough times are common and can take a toll on one’s financial planning. For example – job losses amidst COVID-19 pandemic.
• During such periods, unemployment rises to the peak leading to increase in NPAs in retail loans. For example – According to recent report by Macquarie, NPA of retail loans is set to rise from 2% to 4% on the back of rising unemployment.
• Thus, if an individual is working in a sector which is currently going through uncertain times, it is better to postpone the purchase of house property. This is mainly because if the individual looses job , taking care of EMIs along with monthly expenses can severely burn a hole in their pockets.

5. Will the builder give you the possession of property within your timelines so as to not lose on tax benefits?

• Normally, buying a house property entails a lot of taxation planning.
• However, till one gets the possession of the house property, he/she does not get the tax benefits.
• Thus, the on-time possession of house property from the builder plays a key role here.