Of all the major investment decisions taken by an individual, investing in a new property is often the most stressful. It involves taking a housing loan in most cases, as most salaried and self-employed people are from a middle class income bracket, and cannot afford to buy a property with their funds even in mid-tier cities.
Though many banks give loans up to 80 percent of the value of the property, it is advisable to limit the loan amount up to a maximum of the property value. Starting early is a big advantage, as an individual gets a longer period to repay the loan.
A young person starts his working life in his early twenties. It’s best to start thinking about how to start saving money for a house right from the start, and invest in the property even though you may not be planning to occupy it, at least for the next few years.
The advantage you get is a longer term to repay the loan. So by the time you get married, and are ready to shift to the new house, you would have already paid a part of the loan. The only disadvantage is that your income may not be sufficient to get a loan.
So, how to start saving money for a house? The following key factors should be considered when buying a property:
- Buy a house that you can afford
While making an investment in a property, buying a property beyond your budget is not advised. The loan installments should ideally not be more than 25 percent of your take-home salary.
- Do not buy a house when you are already in debt
Before buying a house, all previous loans should be paid off. A previous loan may affect your loan sanctioned amount, and your monthly budget will also be affected.
Investing for a House Purchase
An individual will get a housing loan, but he should have funds to make the down payment, which will be 25 percent of the cost of the property. At times, it is better to wait till your salary is high enough, as you may not qualify for a loan on a low salary.
If you are wondering how to start saving money for a house, remember that you should start investing in an independent savings account, which will be the surplus of your salary expenses. If you are planning to invest in a property in the next ten years, you should consider mutual funds, which can earn a decent return and beat inflation. These instruments should be liquid investments, which can be liquidated at short notice.
Other points to note when considering how to start saving money for a house are:
- Personal loans should be avoided to finance the down payment. This will increase your monthly outflows, and put you in a debt trap.
- Build an emergency fund of at least 15 months of monthly EMIs, which will help for a short period and help in case of a job loss.
- Take an insurance policy on your housing loan, which will help repayment of the loan in case of unfortunate death.
- Improve your credit score, which will help in getting lower interest rates.
- Compare the rates of different banks, which will help in selecting the best rates.
- Direct investments in the equity market should be avoided as it is difficult to predict the direction of the stock markets in the short run.
- Consider a systematic investment plan (SIP) to finance the repayment of the monthly EMIs.
- An individual can also check whether they are eligible for the credit linked subsidy scheme under the Pradhan Mantri Awas Yojana (PMAY).
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Buying a house is a dream come true. It is best to be well-prepared for this so that your dream doesnot get shattered due to unforseen financial events. To speak to a financial advisor, click here.