When you plan to buy a home, the first question you address is how to buy a home. That means; you must have the necessary financial resources to undertake such a big project. You can get a home loan, but the home loan will not cover 100% of the cost. Typically, the lender gives you up to 85% of the cost of property, the registration charges and stamp duty; so the balance 15% has to come from you. That is not all. You will also need to spend for additional expenses such as furnishing, fixtures, decorations, tiles of your choice, interiors etc.
So, the next logical question is, how much income do I need to buy a home? While the eligibility is something the bank will tell you, what you must plan for is how to have ready resources so that you cover the margin and the additional related expenses. In short, you must be prepared with funds to the tune of 20% to 25% of the value of the property as your contribution.
When to begin planning for your home?
If you have to plan smartly to fund your home loan margin, you need to allow money to work hard. That means you need time. Ideally, you must start the habit of saving as soon as you start earning, but ensure that around 5 years before you buy a house property, you start saving for the same. Property purchase is a once-in-a-lifetime decision for most people. When you plan how to buy a home, the biggest element you must plan well in advance is how to save and invest for the home loan margin. At this point, answering “how much income do I need to buy a home?” is the smaller challenge. The bigger challenge is funding the margin amount.
Rule 1 – Start saving early, even if it be small
When you save and invest for the future, you must understand the time dimension. The longer is your time dimension, the more risk you can take in investing. For example, equity can be very risky for a 2-3 year perspective, but relatively less risky for a 7-year perspective. That is the game that you need to play. When you start early, your principal earns higher returns for longer and therefore even the returns earn more returns. That is the power of compounding and it works best when you start early. In the right mix of assets, even a small saving of Rs2,000 per month can grow substantially over a longer period of time.
Rule 2: Balance risk and returns intelligently
What does this mean? Let us look at numbers. If you can save Rs10,000 per month for 4 years, you need to be in relatively stable instruments. You can hope to earn around 9% CAGR and you accumulate Rs2.90 lakhs after 4 years. Instead, if you started planning 3 years earlier and invested Rs10,000 for 7 years, you can take the risk of equities, that can yield up to 14% on an average (average Sensex returns over last 40 years). In this case, you accumulate Rs14.30 lakhs. You can just see the substantial difference by just starting 3 years early. You can also make it a point, that when you get any year-end bonuses, you err on the side of caution and save the money, instead of splurging on consumption needs.
Rule 3: SIP is the ultimate truth in financial planning
In the last 10 years Indian investors have learnt one important lesson. It is impossible to time the market. The best way is to use discipline and persistent investing. That is how you should overcome market volatility. As we saw in the previous point, by just setting aside Rs10,000 a month in an equity fund at 14% for 7 years, you accumulate a solid sum of Rs14.30 lakhs. The answer is to invest systematically and let rupee cost averaging do the trick. More importantly, it is the discipline that will get you to the margin amount.
Meeting minor shortfalls at the time of moving in
Even with all this meticulous planning, people find themselves short. When you decide how to buy a home, also factor this in. Even before you decide on how much income do I need to get a home loan, work out the calculation for margin money and last minute gaps.