Plan For Your House When You Start Working
How should someone who has just started working after college begin planning to buy a home
?
Firstly, when should one start looking at buying a house? There are many, who due to the tax-saving benefits end up buying a house too early. They buy a smaller house which they are forced to change in a very short time. Some end up buying a house to suit their needs while they are unmarried and then the house it too small for a family. Some stretch their budget a lot and are severely impacted in case of job losses.
Ideally, one should buy a house when you have built up sufficient money for a down-payment and can afford the EMIs. It is always good to plan for a house keeping a family in mind if you are unmarried. You can start planning for your house right from the time you start working. A part of your savings could go into setting up the down-payment for your house.
Going in for a house after marriage would help ensure that both yourself and your spouse are comfortable with the house. It is possible that your spouse is working and thus you can afford a bigger house that is more suitable.
Once you have built up sufficient funds for the downpayment, you need to also ensure that the EMIs on your dream house are within affordable limits. It is good to limit your EMIs to 40 percent of your take-home income.
One additional point you need to look at is what happens in case of a job loss. It is good to either have a buffer to sustain EMI payments or your spouse should be able support the EMI payments in case of job loss.
How should a home loan borrower in the middle of his loan tenure plan for high interest rate phases?
The home loan interest rate at the time of taking the loan is what most people look at. However, many miss out that the interest rate could go up subsequently and either increase your EMIs or increase the tenure of the loan.
Interest rate swings can be high. We have seen the interest rates swing by up to five percent. If there is a significant interest rate increase it is good to make partial prepayments so that the tenure of the loan is not significantly increased. It is especially important if the tenure of your home loan goes beyond your retirement age.
Most of the time you find that the markets are doing well and as the markets peak out the interest rates also rise significantly. If you have the benefit of a strong equity market, you could book profits and prepay a part of your loan. If the timing is right, you would both benefit from profit booking (subsequently high interest rates could alsotrigger a market fall as the corporates show lower profits due to high interest rates) and from the prepayment which will reduce the interest outflow when the interest rates peak out. A disciplined approach of taking out some of your profits and using it to reduce your outstanding can be very effective.
How should a high net worth individual (HNI) plan a property investment?
HNIs have the option of investing either in residential property, commercial property and funds. Commercial real estate requires deep pockets and hence is suited for HNI investors. It may provide a good rental yield which lowers the risk of your investment and provides a stable cash flow.
Real estate funds are also options to use as it gives an opportunity to diversify across a range of properties and segments.
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HNIs can also look at residential properties with a large down-payment and hence can secure a good discount, especially when the real estate market is challenging.
In the long term, how does a property work as a hedge against inflation?
Being a real asset, real estate is also priced based on demandsupply. In the long term, since land is limited in supply, it tends to beat the rate of inflation. Hence, you would find that real estate delivers returns superior to the inflation rate and hence is a good hedge against inflation.
How relevant is financial planning while budgeting for a long-term home loan? What are the basics?
I always recommend that financial planning precedes a long-term investment like real estate. It is important to study one's cash flows and stress-test them for job loss or higher interest rates. Undertaking financial planning helps you take a calculated decision. Real estate is a favourite for many investors and hence one ends up taking an emotional decision.
It is good to put down your yearly cash flows over the full tenure of the loan. You would need to make a few assumptions that can be kept conservative. Study your savings and see if the EMIs fit into your budget. You can also quantify the net tax savings arising out of thehome loan after adjusting for benefits like HRA if you are staying in a let-out property.
What is your outlook on property in Bangalore as a longterm investment?
We are bullish on property in Bangalore as a long-term investment. Asset markets are cyclical and have seen a pretty long downturn. We expect the real estate markets to revive over the next 15-30 months. Hence, this is a good time to look at the real estate investment options.
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We have seen that once the real estate market is in an upswing, it shows sustained growth for quite some time. It is critical that interest rates come down for a real estate boom. We would suggest you focus on capital appreciation opportunities in real estate. You should study the market and invest in such areas that should do better. That could be on the outskirts where there is a certain commercial development coming up, proximity to a ring road, proximity to the airport etc.
One segment that is catching up is projects that are environmentfriendly. As resources become scarce, such properties will see superior appreciation.
by: Imtiaz
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