- December 1, 2018
- Posted by: Moat Wealth Advisors
- Category: Blogs, Financial Planning, Investing
Planning to buy a house requires that you get your finances in order, as buying a house is a huge investment decision. One really needs to plan their finances well and figure out the estimate of the property in order to determine their plan.
Before planning, one needs to do their homework and math well in advance. Firstly, decide on the type of house you’re aiming for, whether it’s a 1BHK or 2BHK and the locality which suits your preferences. Once you’ve decided that, get an estimate of the house considering the inflation rates and the number of years you’re putting in before actually buying the house.
Buying a house is always difficult with your own fund as the corpus required is huge so people like to take a housing loan for the same. One has to decide how much they can contribute from their pocket and how much they want to get through loan fund (home loan). Your ITR and income should also support the amount of loan you need from bank.
Let’s take a look at how we had planned for our client Mr. Shetty who had approached us in 2015 and wanted to plan for buying his dream house in 2018.
Mr. Shetty wanted to buy a 1 BHK flat near Thane before 3 years. The value of the flat back then was 1 Cr Considering the inflation rates, the value of the flat would have become 1.22 Cr after 3 years.
He had savings of 10 lakhs and wanted to contribute around 25% of the property cost through his savings, which he wanted to create in next 3 years and he wanted to take a loan for the remaining 75% of the value.
Snapshot of the requirement and fund structure at the start of planning phase i.e. 2015:
|Amount required after 3 years considering inflation of 7%||Funds Available|
|Own Fund required (25%)||₹30,62,607||₹10,00,000|
|Loan fund required (75%)||₹91,87,822|
|Monthly EMI projected||₹81,000|
To achieve his dream house, Mr. Shetty had to take a loan of around 92 lakhs and he was mentally prepared to pay EMI of around ₹81,000 (loan interest assumed is 8.75% and 20 year tenure). We recommended him to get into a habit of keeping this amount aside to build the own fund corpus for 3 years and invest in liquid fund / debt fund through Systematic Investment Plan to inculcate the habit of regular saving.
After 3 years at an expected return of 7%, his 10 lakhs became ₹12,25,043/- and his monthly Systematic Investment of ₹81,000/- has created corpus of ₹32,53,205/- so his total own fund is ₹44,78,248/-
He went ahead and booked a flat for himself in Thane and made the down payment of 40 lakhs (which is equal to 32.6% of total corpus required) hence he had to borrow only 67.4% of corpus as loan i.e. ₹82.50 lakh with monthly EMI of ₹72,906/-. Which is lower than what he was already saving. We recommended him to stop his SIP of ₹81,000/- and divert ₹72,906/- towards EMI.
Now that his EMI is lower than expected, he has a monthly surplus of ₹8,000/- which was recommended to invest in equity mutual funds and to increase the monthly SIP amount by 15% every year for long term horizon of 10 years with the intention of repaying the outstanding loan through the corpus created by equity mutual fund SIP, resulting into creating his own home/asset which is completely free of home loan liability.
Snapshot of the actual fund structure at the end of planning phase i.e. 2018:
|Amount after 3 years of planning for the home loan||Funds Surplus|
|Own Fund contributed (32.6%)||₹40,00,000||₹4,78,248|
|Loan fund taken (67.4%)||₹82,50,000|
|Monthly EMI actual||₹72,906||₹8,000 monthly|
It is important to plan so that you are able to achieve your goal but if there is a home loan involved, it is also very important to get rid of your home loan liabilities as soon as possible by repaying it.
Failing to plan is planning to fail.
So plan your goals properly and work towards it so that you don’t fail.