Buying a home is a milestone in the life of an individual. Before taking the plunge into the property making phase one needs to analyze his/her current financial situation. One needs to find out how much of expense he/she can afford.
In order to assess the financial situation the concerned person needs to calculate his/her home affordability.
To find out one’s affordability we need to know
• maximum value of house that the person can buy
• additional costs involved in the process of house purchase.
• Cost of Home Ownership.
Here is a list of major components that will make up the house buying expenditure.
1. Purchase Price – The price of house as agreed between Buyer & Seller.
2. Registration & Stamp Duty Charges –A few pointers about those charges.
• Those are the charges which are payable to the local government for registering the Sale Deed of the house.
• Registration and stamp duty is mostly 4-10% of purchase price.
• The percentage varies depending on the location in which the property is located.
• Also the percentage depends on the type of ownership
3. Loan Processing Fee – The fee charged by the Bank to process the home loan on the behalf of the customer. The charges are 0.25-0.5% of the loan amount.
4. Brokerage – The fees which is charged by the Real Estate agent the deal. The fee varies from 0.5% – 2% of the purchase price.
5. RWA Membership Fees – In case, one is buying a house in a gated community, many RWAs (Residents’ Welfare Association) charge a one-time membership fee. In general RWA of an Apartment may charge a lump sum amount of Rs. 20,000 – Rs. 2,00,000 for a flat.
6. Renovation Costs – These costs depend on the condition of house and one’s artistic tase. When a person buys a new House, he is required to spend much more in renovating the house than when buying a semi-furnished one. It’s always advisable to inspect the house before making the final offer to the seller.
Out of these costs Banks will finance upto 80% of the Basic Purchase Price of the house and may include Registration & Stamp Duty charges in some cases.
Mr Sanyal, a IT employee in Bangalore, has a gross monthly income of Rs. 1 lakh. His current EMI liability is Rs. 15,000 that he is paying every month for his car loan. Now, he is looking to purchase a house in Bangalore taking a home loan with a maximum tenure of 20 years. Using Home Loan Eligibility Calculator, we can easily calculate the maximum Loan amount that he is eligible to take. He is eligible to take a home loan amount of Rs. 38,75,262. The loan processing fee @0.5% will be Rs. 19,000 approx. Let’s say, including loan processing fee, Rajiv is eligible for a home loan of Rs. 36 lakhs. Considering 20% Down payment and using the Home Loan Eligibility and Affordability Calculator, we can calculate that maximum Purchase Price that Mr Sanyal can afford is Rs. 48,44,077 (say Rs. 48 lakhs). This means that Mr.Sanyal can fund his house with Rs. 12 lakhs of Down payment and balance Rs. 36 lakhs using home loan.
Now, Let us calculate other costs for him. Brokerage @ 1% = Rs. 50,000 (approx.) Registration and Stamp Duty charges @ 6% = Rs. 2.9 lakhs (say. Rs. 3 lakhs). RWA membership fees (lump sum) = Rs. 50,000 KEB/ BWSSB costs generally in the range 5-8 percent =Rs 3,00,000
By adding all costs, the total cost of home ownership for Mr. Sanyal will be Rs. 55 lakhs. Out of Rs. 55 lakhs, Sanyal will get a home loan of only Rs. 36 lakhs and he should arrange for Rs.19 lakhs for Down payment and additional costs. Cost of Home Ownership is 20% more than the Purchase Price of the house. The extra 20% is to take care of transaction costs (about 10%) and renovation costs (about 10%). If, however, the house is fully furnished and ready to use, one can add only 10% transaction cost to the purchase price to arrive at the cost of home ownership.
To calculate the Home Affordability and plan finances better, consider the below 3 step process:
• Calculate Purchase Price of House.
• Calculate Extra Costs Add to the purchase price, 10% towards transaction costs and 10% towards renovation costs (if applicable).
• Plan for Extra Costs Buying a luxury apartment – key points to remember Prime neighborhood–
• Easy accessibility to Airport, School, Business Hubs, Hospitals, Highways, Markets
• Neighborhood is pollution free, full of trees, crime free , not a high traffic area.
• If at all it’s a high traffic area, easy entry and exit from the property should be there and all luxury and amenities within the development should be available.
Ambiance of the property– A good project should be limited to the number of dwellings, it should not be very densely populated – about 60 homes per acre is reasonable . That covers the feeling of exclusiveness of the building. Also , a major factor is floor-to-ceiling height. Anything less than 12 ft. is a strict no.
Security– Luxury apartments should offer perfect security in terms of personnel and electronic surveillance.
Quality- The check-list should include earthquake-resistance factors built into the property, fire-safety measures in place, quality of the bathroom and modular kitchen fittings, tiling, attention paid to recycling water and waste.
The mod-cons one needs– Most luxury projects leave no stone unturned nowadays in offering all the mod-cons available – concierge services, business centres, indoor games, play areas and facilities, landscaped areas, convenience stores et al. Margin Loans Nowadays buyers are using Margin Loans to get the necessary financing to close their deals quickly. A few Pointers about
• These are loans that are backed by the investments a borrower has. Brokerage firms allow a borrower to take a loan for up to 50% of the value of their portfolio. That loan can be used to pay for almost anything the borrower wants. That includes the purchase of a home.
• These margin loans are usually a short term plan for a buyer to close on a home quickly. Later they will apply for a mortgage or find another form of financing for the home.
• There are also tax benefits associated with using a margin loan.
• There are advantages that come with margin loans when compared with traditional mortgage financing. With a margin loan, no closing cost needs to be paid., no appraisal of the property has to be done and there are no penalties for paying the loan back early. Borrowers are not required to make payments on the interest every month. Still interest will then accrue on whatever the unpaid balance is and that will increase the liability as time goes on.
• Interest rates on margin loans typically as the borrowed amount increases.
• Brokers have a maintenance margin for every loan that requires the borrower’s portfolio to stay above a certain value or money will need to be paid immediately to bring the loan back in line with the maintenance margin.
If you have any questions on the same, please do contact us here
Content Writer , Dilzer Consultants