Should You Buy a Flat Early when You are Young and Can Afford it
Many of you may have big dreams before you reach the age of 27, like clearing your debts, getting a promotion, getting married, owning a flat, or start saving for an early retirement.
Take one step at a time to avoid getting flustered by the financial decisions you need to make before you turn 27.
A step forward in securing your future is to have a flat of your own. To encourage people to invest in residential property, availing home loans is now easier, and the government also provides tax exemptions.
Here are 5 pointers that will help you make the decision of buying a flat before you turn 27.
Have clarity as to why you are buying a flat
There could be many reasons why you want to buy a flat, as a personal choice, as an investment, or out of social pressure.
Buying a flat to live in – Most investors believe that you should, “own the flat you stay in”. By the age of 27, if you are sure about the city you want to live in, your career path, your family plans, and your disposable income, buying a flat is a possible option.
Here’s what you basically need to know to own the flat you live in without getting into trouble:
Affordability to pay at least 27% to 40% of the cost of the flat as down payment
Clarity on the requirements based on your plans – where you want to live, how many years you wish to stay there and your future family plans
Stable income to make repayments on the home loan
Buying a flat as an investment – If you want to buy a flat as an investment option, due diligence is required. You need to:
Track the rate of price appreciation, and the worth of the property in the current market
Consider additional costs of buying, owning and selling a flat like interest, insurance and maintenance
Your EMI should typically be not more than 40% of your take-home salary or income
Buying a flat because of social pressure – Buying a flat because of social pressure, because your parents, family or friends say so, is not a good idea. You need to be 100% certain on your intention to buy, and you should be clear on whether you can afford it. Without this conviction, you may have to compromise on your standard of living, lifestyle and be financially dependent.
Buy a flat based on your needs first, and then your budget
You are earning well and invest in a 1 BHK space that fits your budget. In the next 3 years, drastic changes happen; you get a promotion, get married and have a baby. You upgrade to a 2 BHK to accommodate changes. A few years later, your parents decide to live with you and you need to move closer to your child’s school. Moving to a 3 BHK is inevitable.
You realize that every time you moved, although you found a space at a good price, there were additional costs of 2% brokerage and 8% tax. This additional cost of 10% had created financial pressure and it could have been avoided had you planned ahead before closing on that 1 BHK.
When investing in a flat, it is natural to check out the price first. While this is necessary, what is more important is to consider if the flat meets your requirements. The flat you choose should cater to your needs not only of today, but also of what you may require after 5 to 7 years. In this way you can avoid unnecessary costs, and benefit from eventually owning the flat you live in.
Take advantage of tax deductible options, on the interest of home loans
Under Section 80C of the Income Tax, here’s how you can save tax by claiming benefits on interest and principal repayment of your housing loan:
You can claim the entire amount up to Rs. 1,50,000 on interest paid on home loans
Once you have paid your installments, you can claim deductions on principal repayments up to Rs. 1,00,000
If you are married, take a joint home loan. This way, you and your spouse can claim deductions separately on interest paid and principal repayment. Which means, together both of you can claim Rs.3,00,000 in interest paid and Rs. 2,00,000 on principal repaid.
Plan repayment with disciplined budgeting
It typically takes around 7 years for a person to repay a home loan in India. Assuming that your salary increases at around 12% per annum, and the EMI on your home loan is constant, only the first few years will be stretch. With disciplined budgeting it is possible to create a successful repayment plan.
Best time to prepay home loan – In the first 2 to 3 years not only have you drawn on your savings to pay upfront for your home loan, your salary would not have increased and you have very little surplus for emergency needs. Prepayment is advised only after the 2nd or 3rd year when your cash flow pressures have reduced. You could open an Interest Saver’ account, where surplus can be kept while still being available during emergencies.
Not so good time to prepay – Once your EMI / annual total interest is less than the tax benefit (INR 2 lakhs per year of interest and INR 1.5 lakhs per year for principal prepayment), then one can continue to maintain the loan for tax benefit. The surplus can be invested in financial assets if the expected return is greater than 10%.
For example, if you have a loan of INR 20 lakh, instead of pre-paying in the 1st year, it is better to pre-pay INR 1.5 lakhs each year (principal repayment, adjusted for principal portion of EMI) and take the tax benefit over a 3-4 year period. By pre-paying more than the principal repayment linked tax benefit you lose out on tax benefit.
Be realistic about the returns you expect
Don’t get giddy when your friends say,” There is great wealth that can be made in property investment with the rate of appreciation.”
You need to understand that price appreciation depends on various factors such as location, quality of the construction, connectivity and upcoming infrastructure projects in the area.
The typical expected return on an apartment is about 10-12%, that’s around 8-10% on appreciation and 2-3% on rental. Keep in mind that, on a 12% rate of annual appreciation, if you change your flat after the 3rd year, the impact cost will trim down nearly 1/3rd of your gain.
Remember, that you may not be able to have it all, but you need to start early, invest smart and work towards securing your future with proper financial planning.