Answer these 10 questions before you buy a house

There has been an increase in home buying plans in the past 12 months in the country, according to the new home index of Zyfin research. Despite this surge, real estate is not a good option for investment in most parts of the country, reported the Economic Times.

Property price are still very high and despite the recent interest rate cuts, the cost of borrowing has not come down significantly. For potential borrowers, a 15 basis point will shave off Rs 800 from the EMI of a Rs 80 lakh loan for 20 years. Is that a big reason for them to make the largest financial commitment of their life?

The financial daily has raised 10 questions that a potential buyer needs to answer before he takes the plunge. Don't get us wrong. We don't want to shatter your dreams to own a house. We just want you to take a reality check. If most of the questions are answered in a 'no', take a step back and revisit your plans.
1) Can you afford the home loan EMI?

It might sound a no-brainer, but many home buyers get this wrong and bite off more than they can chew. The home loan EMI should be around 40% of your net household income. But that is if you don't have other loans. A high EMI outgo can put your household budget under pressure.

2) Have you factored in the other costs?

Like many other products, a house also has ancillary costs that need to be paid for. The price advertised in the media is usually the base price of the property. The add-ons are usually kept hidden till you sit down with your cheque book. Many builders will slip in charges for facilities that you thought were free with the property.

3) Have you done a thorough rent versus buy analysis?

The old saying that "fools build houses and wise men live in them" has been proved incorrect several times in the past. But the high property prices across cities mean that renting is certainly a better option now.

4) Will the value of the property rise faster than the interest on loan?

In the early 2000s, when home loans were available at 6-7% and property prices were galloping at 20-25%, it made eminent sense to invest in an upcoming apartment project. You could book two properties and sell one of them after a few years for a profit big enough to repay the entire loan taken for the first property. Those days are now history. Property prices are now appreciating at a slower pace. In some markets, such as Noida and Greater Noida in the National Capital Region, prices have even come down in the past 12-18 months.

5) Will this purchase force you to postpone other major goals?

Stagnant property prices and high EMIs are not the only problems that potential home buyers should be wary of. Their home buying plans can have serious implications on other financial goals, such as saving for their children's education and marriage and their retirement.

6) Do you have a contingency fund?

Real estate is not a liquid investment. You can't sell it at short notice, nor break it up into parts. Invest in it only if you do not need that money at short notice. This also means one must have an emergency fund to take care of 3-6 months' expenses. If you plan to use your emergency funds to pay the downpayment, you could be making a big mistake. A financial emergency can put you in a terrible spot, with the home loan EMI exacerbating the problem.

7) Will you live there for 10-15 years?

We live in a society that assigns great importance to physical assets. Owning a home is seen as a sign of achievement and stability. However, buying a house too early in your career can hamper your prospects.

8) Will you be able to earn decent rent from your house?

Many investors in property are looking for two streams of income: capital gains from the rise in its value and rental income from the property. But don't get carried away when you calculate the potential rental income from your property. Many investors think that the future rental income will be enough to pay their EMIs. However, the rental yields (the annual rent received from the property as a percentage of the value) are very low in Indian cities.

9) What if your income stops?

We have covered this aspect earlier but this is different from a short-term contingency plan. The Job Security index of ZyFin Research has steadily climbed in the past 12 months. But have you factored in the possibility of something untoward happening to you? Is your family prepared for the worst?

10) Will the builder deliver in time so that you don't lose tax benefits?

Delayed projects are no longer news. According to PropEquity, the average delay in the Mumbai Metropolitan Region is 25 months. In the worst hit Delhi NCR region, it is 33 months. Delays can be particularly debilitating if the buyer had expected EMIs to replace the monthly rent payment. If the project gets delayed, they have to fork out money for both. Even those who buy property purely as an investment are hit. They are paying EMIs but there is no sign of rental income.

(Image: Indiatimes)