When Should You Buy Your First House

[00:00:00] Hey folks, CA Rachana Ranade here and I welcome you all to another episode of Finance Simplified,

[00:00:05] the podcast.

[00:00:06] Which is about factors that you should consider before buying your dream house.

[00:00:10] So let's get started.

[00:00:12] Well, to be honest, I had never thought about this specific topic.

[00:00:17] It was you all who gave this amazing input and then I thought this is a really wonderful

[00:00:22] topic.

[00:00:23] Let me take this right away.

[00:00:24] But wait, if you are first of all confused between whether you should rent a house or

[00:00:29] whether you should buy a house, this is not for you.

[00:00:32] Well now that you have decided that yes I am going to buy a house, then start these questions

[00:00:38] as to what will be the budget of your house, loan, down payment and what not.

[00:00:43] So here we are and let me give you that same knowledge pill and let's continue.

[00:00:47] Let's start with the very first and most important question as to what should be the budget

[00:00:52] for your house.

[00:00:53] Is there any thumb rule for that or not?

[00:00:55] The answer is obviously yes, the thumb rule goes like 52040.

[00:00:59] Now what is this 52040?

[00:01:02] Basically it says that the cost of your house should not be more than 5 times of your annual

[00:01:08] income right.

[00:01:09] Now what is this 20?

[00:01:11] If you are taking a loan to buy a house, the loan tenure should not exceed 20 years and

[00:01:16] last what is 40?

[00:01:19] 40% of your total income should be the maximum EMI amount.

[00:01:24] So I hope you have understood what is 52040 but wait.

[00:01:29] Now you might be like Rachana, if my income is let us say 10 lakhs.

[00:01:32] Now you are saying 5 crore.

[00:01:34] So 10 lakhs into 5 will be 50 lakhs in a city like Pune where am I going to get a house

[00:01:40] or decent enough house at 50 lakhs.

[00:01:42] So in the case of whenever I am going to talk about buying a house, the definition of

[00:01:46] income that I am taking is not your individual income but I am taking that as a family income

[00:01:51] right.

[00:01:52] So you assume your package is 10 lakh and your husband or your spouse's package is 10

[00:01:56] lakh.

[00:01:57] Then totality of the income that is a family income is 20 lakhs multiplied by 5 now the budget

[00:02:02] for your house will be 1 crores.

[00:02:04] I hope this point is absolutely clear.

[00:02:06] Now let us move on to another important aspect.

[00:02:09] If you remember I have talked about this rule many times 50, 30, 20 rule.

[00:02:13] Now if you remember whatever income you earn out of there 50% goes for needs, 30% goes

[00:02:18] for once and 20% mandatory saving.

[00:02:21] So you might be like Rachuna in the previous rule when you said 40% will go to your EMI.

[00:02:26] Now you can imagine in this 50% bucket if I put 40% EMI, I will be left with only 10%

[00:02:33] to meet my daily needs.

[00:02:35] Now could that lead to a problem yes mentally basically no one has stopped you to shift

[00:02:41] from here to here but if you do not want to have that mental block as well what can

[00:02:45] you do please understand.

[00:02:47] Buying a house is that a need yes is that also want yes is that also an investment yes.

[00:02:53] Well even if you are buying that as a first house you can say that it is an investment

[00:02:57] in your lifestyle why not right.

[00:03:00] So if that be so the 40% of your EMI can be divided like 20% as a need 10% as a want

[00:03:08] and 10% as your savings.

[00:03:11] I hope this entire point has given you enough clarity on how to budget for your first house.

[00:03:18] So whatever we have discussed till now let me give you an amazing example so that the

[00:03:22] entire idea will be absolutely crystal clear.

[00:03:25] So let us take 3 cases of Mr A, B and C. Now the family income on all these 3 cases

[00:03:31] is say 12 lakh 18 lakh and 24 lakh.

[00:03:34] Let's take out the monthly income as well dividing it by 12 these are the numbers for

[00:03:37] the monthly income.

[00:03:38] We are not going to need them right now but let's keep them for the time being.

[00:03:42] Now if you remember I told you that what could be the exact cost of the house it could

[00:03:47] be ideally 5 times of your income.

[00:03:49] So simple 12 lakh multiplied by 5 is 60 lakhs same case with B and C it will come to 90

[00:03:55] lakhs and 1 crore 20 lakhs respectively.

[00:03:57] Now if you want to go ahead and take a loan to buy this house always remember a thumb

[00:04:02] rule you will get maximum up to 80% of the cost of the house as a loan and balance 20%

[00:04:09] you will have to do a down payment.

[00:04:10] So in case of Mr A the 60 lakhs will get split up as 20% and 80% which will come to 12

[00:04:17] lakh as a down payment and 48 lakhs for the loan amount.

[00:04:21] Same case 20 and 80% will go for Mr B and Mr C.

[00:04:25] Now let's come to the EMI amount.

[00:04:27] EMI in our example have taken at 7.5% fixed rate.

[00:04:33] Again for your understanding you must be aware of the fact that there are 2 rates in which

[00:04:37] we can get a home loan one is known as a fixed rate, one is known as a floating rate but

[00:04:42] if I take a floating rate then the calculations can be like really complex so for that I have

[00:04:46] taken a fixed rate.

[00:04:48] One more important point is that I have taken the tenure of the loan as 20 years why remember

[00:04:53] for the 520 and 40 rule exactly for that I have taken it.

[00:04:56] That 7.5% for 20 years for Mr A comes to 38668 for B it comes to 58000 and 3 and for

[00:05:03] C it comes to 77337.

[00:05:07] Now if I calculate EMI as a percentage of monthly income, for A I can say I will calculate

[00:05:12] that as 38668 divided by 1 lakh and that comes to around 39% of the monthly income for

[00:05:19] B it is exactly the same and same goes for C.

[00:05:22] All in all I can say that in case of A or B or C it is fitting into the 40% criteria but

[00:05:29] then I am sure you might again have a question that if this be so, is there any magic trick?

[00:05:35] Is there any amazing stat through which I can get a confidence that yes I can repay

[00:05:40] this 20 years loan in a matter of 10 years.

[00:05:43] Now let's take the example of Mr A whose loan amount was 48 lakhs.

[00:05:48] Now had he repayed the entire loan with the normal EMI amount, he would have been able

[00:05:52] to knock off his entire loan in just 20 years.

[00:05:56] But instead of that had he gone ahead with another option wherein he would have increased

[00:06:01] the EMI by just 2% he would have been able to repay the entire loan in 15.5 years.

[00:06:08] Let me give you another option had he gone ahead with a 5% extra EMI then he would have

[00:06:14] been able to repay the entire amount in just 12.5 years and now comes a magic option.

[00:06:22] If he had gone ahead with one extra EMI every year he would have been able to repay the

[00:06:28] entire loan ideally of 20 years in just 10.5 years.

[00:06:35] But this one extra EMI every year how does the math work for that?

[00:06:39] Now let's continue with the same example of Mr A and let us say that is monthly EMI was

[00:06:44] let us say 10,000.

[00:06:45] So first just to simplify the example first I will start with year 1.

[00:06:49] So tell me if EMI was 10,000 how much was the total EMI that he paid in the year 10,000

[00:06:54] multiplied by 12?

[00:06:56] So his total EMI was 1 lakh 20,000 so total cash outflow is how much?

[00:07:00] 1 lakh 20,000.

[00:07:01] Now what are we going to do in year 2?

[00:07:04] I will say that okay anyways he is going to pay 1 lakh 20,000 but in addition to that

[00:07:10] the previous year's cash flow divided by 12 means what 1 month extra cash flow he has

[00:07:16] to pay this year.

[00:07:17] So previous year's cash flow was how much?

[00:07:19] 1 lakh 20,000 divided by 12 so that comes to 10,000 so this year A will be paying 1

[00:07:27] lakh 30,000 as the total cash outflow right.

[00:07:31] Now what will happen with year 3 now let us understand see year 3 basis now at 1 lakh 30,000

[00:07:37] if he was able to pay 1 lakh 30,000 in year 2 why can't he pay 1 lakh 30,000 in year

[00:07:42] 3 obviously.

[00:07:43] So now base of cash outflow is going to be 1 lakh 30,000 plus what?

[00:07:48] 1 month cash outflow of previous year so it is going to be 1 lakh 30,000 divided by 12

[00:07:53] so Ruputtakya.

[00:07:54] 10,000 833.

[00:07:55] 10,000 Zorakshanki.

[00:07:56] 10,000 833.

[00:07:57] Or Zorakshanki.

[00:07:58] 10,000 833.

[00:07:59] So now the total will come to 1 lakh 40,000 833 I hope you are understanding.

[00:08:07] So now the starting is just 1 lakh 20,000 in year 1 paid 1 lakh 30,000 in year 2 is paying

[00:08:13] 1 lakh 40,000 833 in year 3.

[00:08:16] One last example let us see what happens in year 4.

[00:08:20] Year 4 what is the base now new basis 1 lakh 40,000 833 148,38,38 divided by 12.

[00:08:27] 11,736.

[00:08:28] 11,736 and what will be the total amount now 1 lakh 50,2500 and 69.

[00:08:40] 69 alright.

[00:08:43] So 1 lakh 52,569 will be the cash outflow for year 4 and in this way I hope you have understood

[00:08:51] that how his cash outflow is going to go on increasing year after year and by this magic

[00:08:57] math trick he will be in a position to repay the entire loan in just 10.5 years.

[00:09:04] But now the big question is that at the end of 10th year you can imagine to what amount

[00:09:09] this cash outflow might have gone to and now you will challenge me that Rachana how on

[00:09:13] earth will that be 40% of the total income right that 520 and 40 that 40% rule might

[00:09:21] not be met but for that I have a counter for you please understand that your monthly income

[00:09:26] or your yearly income is not going to remain constant over the period of 10 years whatever

[00:09:31] was your income in year 1 and whatever would be your income in year 10 there will be a

[00:09:35] big difference in that as well right.

[00:09:38] So I hope you have understood this magic trick of repaying the loan in just half of the

[00:09:43] 10 year.

[00:09:44] Now let's move on to the next question is what could be the ideal time to buy your first

[00:09:49] house?

[00:09:50] When the simple answer to that is earlier the better now why because right now I told you

[00:09:55] that your repayment of loan the 10 year is ideally going to be somewhere around 20 years

[00:10:00] in fact there are certain cases where you can even repay the loan upto 30 years also.

[00:10:05] We have not discussed about this that in this but even if I were to take 20 years as a

[00:10:09] time frame you can imagine if a person were to take a loan at the age of 40 then what would

[00:10:14] be his working life that is very limited for him so his working life end of the working

[00:10:20] life and loan repayment will almost coincide.

[00:10:23] In that case banks might not be that keen to give loan to a person who is in his 40's

[00:10:29] vis-a-vis if a person is in his 20's then in that case the working life of that person

[00:10:34] is quite large and banks would be much more happy and willing to give loan to such a

[00:10:39] person.

[00:10:40] Of course other conditions like his credit score and all that that will be checked by

[00:10:44] the bank no doubt about that.

[00:10:46] Well this in place now the next big question is that how should you finance your house?

[00:10:52] So here you have two options one is do a cash down and buy a house oh my god there will

[00:10:56] be really very few people who will be able to do that majority of you will fall in the

[00:11:00] category of taking a loan and buying a house same had happened with me when I bought

[00:11:04] the house right.

[00:11:06] Now what is the biggest advantage if you buy the house with entire cash down whatever

[00:11:10] is the cost of the house will be your actual cash outflow nothing extra big is positive

[00:11:15] what could be the negative side though whatever is your amount with you that will be completely

[00:11:20] blocked or major amount will be blocked in one single investment that will that will

[00:11:24] be your real estate investment and that is why the opportunity cost of these funds can

[00:11:28] be higher right.

[00:11:30] Let's go out with the loan amount or the loan perspective in that case you'll have three

[00:11:34] major advantage one is the tax angle the second one is a legal angle and the third one is

[00:11:38] from a final personal finance perspective.

[00:11:40] What is the biggest positive from the tax angle number one you get two lakh rupees per

[00:11:45] owner as a tax benefit for the interest amount and number two you get 1.5 lakh rupees per

[00:11:51] owner from the principal repayment perspective okay so two tax benefits if I am talking about

[00:11:56] the legal point biggest advantage if you take a loan what see the bank is going to do

[00:12:00] a due diligence bank is going to see whether all the documents are in place whether the

[00:12:04] title is clear and then only they are going to give you a loan.

[00:12:07] So you are very much having you are going to have a piece of mind when you're taking

[00:12:11] a loan to buy the house property.

[00:12:12] Now if I'm talking about the personal finance angle what is the benefit of taking a

[00:12:16] loan?

[00:12:17] First and foremost is that because you know that a huge chunk of your monthly income

[00:12:20] is going towards the EMI repayment you will be automatically you'll be frugal while

[00:12:26] you know spending for other expenses.

[00:12:29] Number two important point is that if you're repaying your home loans on a regular basis

[00:12:34] your civil score will also automatically improve and number three is that because your entire

[00:12:40] money is not being blocked in a single investment avenue that is the reason why you will have

[00:12:45] some funds free to invest in other investment avenues.

[00:12:50] What is the biggest downside if you go ahead with a loan?

[00:12:53] The actual cost of your house will be way too higher because of the interest component

[00:12:59] of the loan amount.

[00:13:01] Let's move ahead with four additional important points that you must consider before you're

[00:13:05] buying a house property.

[00:13:07] Number one is that whenever you finalized any house property and if that project is registered

[00:13:12] under RERA I would highly recommend that you go and check out the website and where you

[00:13:17] can see a lot of disclosures which are mandatory to be given by the builder.

[00:13:22] Now I'll give you my personal example.

[00:13:24] I had almost finalized the house property and that builder had told me that we have a

[00:13:28] fantastic basketball court this that all these amenities inside our society.

[00:13:33] When I checked on the RERA website I found out that there's no basketball court which

[00:13:37] was in the scheme.

[00:13:40] After looking at all these disclosures I decided that builder is not very true and honest

[00:13:44] and that is the reason why I cancelled my decision and I decided to move into another house

[00:13:49] property.

[00:13:50] Number two one more very important point is that if you were to take a decision whether

[00:13:54] you want to go ahead with a under construction property or ready to move in property my personal

[00:13:59] suggestion would be you should go ahead with a ready to move in property.

[00:14:02] Why?

[00:14:03] Just in case if the builder is not able to complete the construction in time in that case

[00:14:08] you have to pay the EMI's plus you're also paying the home rent also so it's a double

[00:14:13] cash outflow which is happening at your end plus the tension of whether the property will

[00:14:17] be really completed or not that is extra.

[00:14:19] So again to sum it up my recommendation would be go ahead with a ready to move in house

[00:14:23] property.

[00:14:24] And the third one is that you should ensure that you are having a proper home insurance

[00:14:29] when you are taking a decision to buy a real estate property.

[00:14:31] Well is this is at all no one last and important point is that whenever you are buying any house

[00:14:37] it is not only the basic cost of the house but all these additional charges also which

[00:14:41] you have to bear so keep all these costs in mind and then only take your final decision.

[00:14:46] Well whatever we discussed till now all were the quantitative factors what about qualitative

[00:14:51] factors?

[00:14:52] All the factors that you have to look at before you buy the house the qualitative factors

[00:14:57] are something like this.

[00:14:58] When the very first one is emotional security I mean those who have been living in an

[00:15:03] owned house since your birth you will not be able to understand with this point of emotional

[00:15:07] security but any person who has stayed in a rented house and has had the pain to change

[00:15:12] the house after every 11 months can definitely agree to this point that finally up and

[00:15:17] out if it's up and out.

[00:15:19] So I think that is an emotional point which definitely gets added up.

[00:15:22] The second one is capital appreciation if you are owning the house then whatever is

[00:15:26] the case on an average 6% capital appreciation is what we have seen that is the caggar of

[00:15:31] capital appreciation over the period of last few years.

[00:15:34] The third one is that finally even if you are taking a house property with the help of

[00:15:38] a loan the moment you are paying your EMI as and how you go on repaying the loan your

[00:15:43] equity your ownership in the house goes on truly increasing.

[00:15:48] So even if it is taken on loan finally you are building an additional asset for yourself

[00:15:53] and last but not the least if you are buying a house property there is no landlord

[00:15:57] has else.

[00:15:58] Otherwise here I create okoka he frameikerala aolele sayaka you have to ask for all small

[00:16:02] small things to the landlord and then only take a final decision.

[00:16:06] I hope with the help of this video you are able to understand all the qualitative factors

[00:16:10] as well as quantitative factors once you decide to buy a house.

[00:16:15] Thank you for joining us on this episode of finance simplified I hope you enjoyed listening

[00:16:19] to this podcast and also found some value in it.

[00:16:21] If you did don't forget to share it with your friends and relatives till then take care

[00:16:25] Jai Hind.