Buying a house? Here's how to prepare yourself financially

Posted by: Arti Bhargava on Sep 04, 2017, 06.30 AM IST

Software consultant Nitin is 30 and lives in Bengaluru. He wants to buy a house now that his income is stable and he expects to stay on in Bengaluru for a fairly long time. He knows that this is a big financial decision, which will affect his money situation. He wants to ensure that he is financially prepared.

Nitin has to be ready to make the long-term financial commitment that buying a house entails. He may have to change his spending and saving habits, at least in the immediate future. To make the change as comfortable as possible, he must first decide how much he is willing to spend for the house. This will depend upon the amount of EMI he will be able to service. Drawing up a household budget that will consider his expanded future income as well as higher expenses as his family grows, is an efficient way of doing this. In terms of an immediate financial requirement, he must be ready with the down payment, about 15% to 20% of the cost of the house. Nitin must arrange for this sum from his existing savings and investments.

There has to be a balance between the commitment that will eat into his income and cutting back on expenses to build an asset. While he may want to stretch it a little for the sake of a long-term asset, any budget overrun will create unnecessary pressure. ( Also read: How not to finance downpayment for buying home )

Once Nitin has fixed his budget, he must shop around for good loan terms. He must get an in-principle loan approval so that he does not lose out on his preferred home just because the finances were not in place. He must structure the loan on terms that will suit him. For instance, step-up loans will allow him to pay higher EMIs later in the tenure when his income increases.

Similarly, he must start liquidating his investments that are going to fund the down payment and move the money into liquid investments that he can easily access. Doing all this will ensure that Nitin is ready to deal with this milestone in his financial life.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta. This article appeared in Economic Times dated Sep 04, 2017, 06.30 AM IST