ATM :: When and how to buy your dream home

By ET Bureau | 9 Dec, 2013, 08.00AM IST | Economic Times


Buyers are faced with several dilemmas when they purchase a house. Here are the answers to some of the key doubts:

Real estate, though a mainstream investment and probably a part of every financial portfolio, is also unique. It is the single largest financial commitment that most people make in their lifetimes. Buying a property also involves a lot of subjectivity and is not just a factor of the property’s price or the interest rate on the home loan. Here are some questions you are likely to face in your quest for a good property:

Rent Or Buy?

Becoming a house owner means not having to deal with pushy landlords, poor maintenance and annual rental hikes. Plus, there’s the feeling of having fulfilled one of life’s most important financial goals. But owning a house comes with its own worries: you get tied to a location and moving becomes difficult; you get tied to an EMI; and selling the house is not easy in case you need cash at short notice. While paying rent may look like throwing money down a sink hole, it does offer you freedom from some of these worries.

Should You Invest?

If you are looking at a property purely as an investment, the current real estate market also becomes a factor in your decision. That will determine when you recover your investment, and when you begin to earn profits on it. Rental income is an important lure. Most people think it will help them pay the EMI. While that may be partly true in some cases, the equation changes if you have availed of a home loan to invest in a property.

New Or Resale?

The biggest benefit of buying in the resale market is that the construction is almost complete. This can be a big relief at a time when most projects are getting delayed. Also, not all resale properties in the market are old ones; most have probably never been lived in.

In some cases, such as properties that were lapped up by investors at the pre-launch stage, the price may be lower than the builder’s tag. However, in the resale market, the down payment may be higher. The seller may also ask for a portion of the price to be paid in cash, which means that you will be able to take a smaller home loan. The home work and paperwork required in case of a resale project may also be more.

Hire A Broker?

If you do decide to buy a house, you will have to negotiate for discounts, choose between payment plans and also between locations. Will you need the help of a broker or a lawyer? In most cases, with a bit of research and running around, you can take the decisions on your own. But if you do not have the time, hiring these specialists may not be a bad idea.

Renovate Or Relocate?

After living in their houses for some time, homeowners often discover that they need more space. Migrating to a new location may not always be a cost effective option. In most cases, you may have to sacrifice moving from a centrally located area to the suburbs. Remodelling can sometimes help expand your current house. The decision to move or modify is a critical one, because a misstep could cost you a significant sum of money and a lot of time.

When should you buy or rent a house?

Scenario 1: When property prices are going up

ET Wealth: When and how to buy your dream home

If prices increase by 5 per cent a year and rent by 10 per cent, the cost of renting will be higher from the second year. Buy to save money in the long run. (Negative value of price means you are saving money instead of spending; Green curve : Renting; Blue field: Buying)

Scenario 2: When property prices are flat

ET Wealth: When and how to buy your dream home

If prices continue to remain flat for some time, while the rent keeps rising by 10 per cent, renting a house will be cheaper for most of the term. (Green curve : Renting; Blue field: Buying)

Buy your own house if …

1. you know you will stay.

2. you can weather rate hikes.

3. you know that property prices are likely to rise.

When do you recover the cost?

Rental income helps recover the cost of a property earlier, but the recovery period also depends on whether you have taken a home loan.

Assumptions: Cost of property: Rs 65 lakh; Rental income: Rs 20,000 a month

Home loan: Amount: Rs 52 Lakh; Tenure: 20 years; Interest rate: 10 per cent

Paying for a house

Which payment option should you go for?

1. Down payment

Go for it: If you want the maximum discount and you can afford the payment. But not if you think you may earn more than your interest outgo from the same funds.

Remember: Once you have paid the entire money, you are at the mercy of the developer if the project is delayed or postponed.

2. Construction linked

Go for it: If you can’t afford a substantial down payment. Since you pay only when the construction milestones are achieved, the risk of project delay is lesser.

Remember: If your payments are late or if you miss an installment, you can be liable for a specified penalty.

3. Flexi plan

Go for it: If you have enough cash to pay 50 per cent amount. The cost of the flat will usually be less than in a construction-linked plan by almost 6 per cent.

Remember: Most builders will levy a penalty if you plan to shift to a construction linked plan midway.

4. EMI sharing scheme

Go for it: If you are getting a good deal but cannot afford to pay both rent and EMI at the same time and would like to defer payments till you get possession.

Remember: The cost of interest payment is recovered by the builder from you by adding a premium to the cost of the flat under this scheme.


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