Roti, Kapda aur Makaan are three basic necessities of a common man. Most of the people are able to fulfill the first two, but fulfilling the third one is a big challenge for many. Hence large number of people stay on rent / lease and keep on changing or renewing their lease contract every 11 months. This is not only the case of low-income group people but of middle-income group people too. They wish, they had their own house which would give them mental peace and satisfaction. Everyone wants to have their dream house, where they can live their life happily and peacefully with their family. There are some people who stay with their parents or their siblings, but still aspire to have their own house.
Why are these people unable to buy their dream house? Why are they not able to accumulate the corpus required for buying a house? One of answer to these questions is because they have never planned for buying their dream house or they did not plan correctly. It is very difficult to achieve your goal, unless you plan for achieving it in the right manner. It is very important to plan for your financial goals; be it buying a house or for retirement or any other goal, by considering factors like time to goal, increasing cost / value of the goal / asset i.e. inflation and suitable investment instruments.
Real Estate is considered to be an asset class, which appreciates with the pace of inflation. So, when you are planning to buy a house of a certain amount, particular Sq.Ft. area and after a certain number of years, you need to account for price appreciation as well. Buying a house is a lumpy investment that requires a huge one-time payment. But today even if you do not have any investments or assets, Home Loans have made it convenient for a common man to buy a house, which can fund approximately 80% of the property value. So, you just need to plan and start investing from today to accumulate 20% of property value for buying your dream house, balance can be funded with the help of a home loan. Usually in such cases, after buying the house on home loan; on one hand you save the house rent that you were paying and the monthly investment you used to make for accumulating the corpus; and on the other hand you start paying EMI on the home loan. The sum of previous cash outflow is almost equal to the EMI, so the net cash flow remains almost same.
Let’s take an example; Mr. Ravi wants to buy a 1 BHK flat at Borivali after 6 years, which costs Rs.75 lakhs today. He does not have any existing investment assets and would like to buy the house on home loan. After six years, the same 1 BHK flat will not be available for Rs.75 lakhs, its value would have appreciated to Rs.1.30 Crores (assuming price appreciation @ 10% p.a.). So, he should plan to accumulate a corpus of at least Rs.26 lakhs to make 20% down payment (20% of Rs.1.30 Crores). To accumulate this corpus, he will have to invest Rs.25,000 per month in Balanced Funds of Mutual Fund (assuming a return of 11.50% p.a.). With the help of this investment, he will be able to accumulate a corpus of Rs.26 lakhs, which will be utilized for making the down payment for house, and for the balance amount of Rs.1.04 Crores he can take a home loan. For this Home Loan of Rs. 1.04 assuming an interest of 10.50% per annum, his EMI would be Rs.1.04 Lakhs for a tenure of 20 years. Mr Ravi will have to account whether his future income will be able to support this EMI which should not be more than 50% of his monthly income. So you should also take into consideration the affordability before choosing your property. Before going in for a home loan, you need to keep your credit card expenses in check, re-pay all other loans say car loans or personal loans which you may have to have ease in serving your home loan. This may also enable you with enhanced eligibility.
This way Ravi needs to consider the impact of increasing real estate prices and start the necessary investment. Not only this, he needs to take into account projections of his future income, cash-flows and other liabilities, he will not be able to accumulate the desired corpus and would end up buying house of lower value or postpone buying the house.
It is rightly said, “Failing to PLAN, is Planning to FAIL”. This is what actually happens with most of the people. So, it is very important to plan if you want to buy a house by considering the price appreciation and investing the required amount systematically to accumulate the desired corpus.
Published in: Mumbai Mirror - Affordable Homes
