Prepare your finances before buying a house
Apr 29, 2014
Source : The Economic Times


MUMBAI: Moving out of a rented apartment to one's own house is a dream that cuts across income groups. Besides, easy home loan offerings from financiers, including banks, have caught the fancy of many in recent years. However, the huge debt burden has also spelt doom for a large section of aspiring homebuyers, especially those who did not assess their financial ability to service a loan over the long term before taking the plunge.

"Buying a home requires long-term commitment. A part of your income will be blocked to service the EMI and, therefore, it can have an impact on your other goals and priorities," says Shiv Kukreja, founder & managing partner of Ojas Capital.

Are you in a position to make one of the biggest decisions of your life? Take your home-buying plans for a test drive to know where you stand. Arranging for the down payment With the Reserve Bank of India mandating financial institutions, including banks, not to exceed 80% of the cost of a house while extending loans to homebuyers, you will need to shell out a large sum as down payment.

For instance, if you buy a house worth Rs 50 lakh, you will have to pay 20% of the amount, or Rs 10 lakh as down payment. However, for housing loans of up to Rs 20 lakh, banks can finance up to 90% of the total value of the house. The ideal way to arrange for the down payment is to save over a period of 4-5 years and start shopping for your house when you are ready.

However, if you have not done so and are planning to buy a house, identifying existing assets that you can liquidate should be the first step towards fulfilling your dream. You can tap into your investments in fixed deposits, Ulips, mutual funds, stocks and life insurance policies. Ideally, you should not tap your retirement accounts, such as the PPF and EPF, but if the need arises and you do dip into these funds, make sure you recoup the amount withdrawn at the earliest. Remember that buying a house shouldn't throw a spanner in the works of other important long-term life goals, such as your child's higher education or your own retirement.

You can either monetise your liquid assets, such as FDs, Ulips, mutual funds, jewellery and equity and debt investments, or consider taking a loan against your life insurance policy or PPF. You can also make partial withdrawals from your PF ac-count as the amount is not taxable if you buy a house with it. Taking a loan against your life insurance policy also has benefits as the interest rate will be lower and you will have an easy repayment schedule. The outstanding loan amount, if any, can also be adjusted with the surrender value when the policy matures.

However, you cannot take a loan against a pure term insurance plan. Besides, you can utilise a monetary gift from your parents or relatives to arrange for the down payment. Taking a personal loan or a loan on your credit card to arrange for your down payment should not be considered as the exorbitant interest rates could lead you into a debt trap. Can you afford the loan?