Tag Archives: Affordable home

Know your budget before home buying

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Bottom Line: Affordability calculation is key for homebuyers before they begin their house hunt.

Track2Realty, Track2Media, India Real Estate, Valuations of Real Estate, Realty News, Property News,Snigdha Srivastav was on a house hunt in Mumbai and she had zeroed down to a few properties in the city. Unfortunately, she did not apply the ‘Do it Yourself’ budget calculations and hence found her on square one when she approached for a home loan. Most of the properties that she had been planning to buy was above Rs. 1.5 crore, while her budget or credit worthiness was not above Rs. 1 crore. She did not have Rs. 50 lakh in cash either to pay to the builder upfront.

“I was literally in a catch 22 situation and remained undecided for quite some time. Had I opted for the apartment that I had really liked the most, I would have been in a future financial mess, and had I gone for financial prudence it would have meant property hunt from beginning where my feeling would have been that of compromising with my lifestyle choices and needs,” says Snigdha.

Snigdha is not the only prospective homebuyer who often fails to figure out the true budget when shopping for life’s most valuable asset. In a housing market like Mumbai where the homebuyer education is mising and the available information is mostly half-baked, the importance of affordability calculations is often not understood.

However, knowing the budget through affordability calculations will save a homebuyer from looking at houses one can not afford. Looking at the houses that are beyond the budget gives a homebuyer unrealistic expectations about the type of home one would like to live and then make homes that fall into their budget look less appealing.

Ground reality

Affordability calculation must be part of the homebuyers’ education

Self assessment of affordability calculation saves from over-expectation with house and over-leveraging

Banks affordability criterion only factors borrowers’ income and legal financial liabilities

Financial liabilities of a borrower may be over and above what is on his account books

Any house that costs more than 5 years of gros income and 50% of take home salary as EMI is not within the budget

Bottom up approach

Experts point out that it is better to start looking at the bottom of your price range or even below your price range and work your way up. That way, a homebuyer will psychologically appreciate what Rs. 1 crore can get them and what Rs. 80 lakh was not giving them earlier.

Moreover, the afordabiility calculation also equips the homebuyers to deal better with the lending institutions and banks. Banks may say to a homebuyer that he can afford more than what one is actually comfortable paying for. This is because the banks or lending institutions focus on their interest, keeping in mind the repayment capacity in absolute terms.

More often than not, the lenders’ detailed financial information when one applies for a mortgage loan will look into one’s earnings and repayment capacity but not factor in their basic survival costs like grocery, medical expenses, lifestyle choices and other financial liabilities that are not on the acount books.

The lending party audit only calculates the expenses that a borrower is legally obligated to pay. It is a homebuyer who should know nd be clear in the mind how much one can afford and not over-leverage. Such calculations are beyond the one-size-fits-all borrowing limits of homebuyers that is based on the banks’ partial picture on the borrower’s financial situation.

Homebuyers must ask self

How much do I have to pay upfront

Can I afford the EMI

What are my fixed & variable monthly expenses

Will house appreciation be faster than interest on loan

Will house purchase affect short-term & long-term financial goals

Expert speak

Devina Ghildial, ex-MD, RICS – South Asia agrees that thinking frugally is not a bad thing, especially when it comes to buying a home. Before potential homeowners start looking at houses and home loans, it is important to figure out how much ‘home’ can you truly afford. Taking into account your affordability can help serve a two-fold purpose. So when you start looking at houses, do not look at ones you can not afford. This sets an unrealistic expectation about the type of home you want to live in and will make homes that actually fall within your price range look less appealing.

“More importantly, do your own calculations on a loan you are comfortable repaying. No one knows your disposable income and fixed expenses better than you do. So, when you freeze on a budget, take into consideration your household income post tax; your recurring expenses; household expenses; and how these would be impacted if you were to buy a new home. Ask yourself whether the cost of living would go up basis location / proximity to work etc; would any costs go away etc,” suggests Ghildial.

The first step in buying a home is to identify the amount that can be invested in the property from one’s past savings and assets along with one’s repayment capacity and the amount of loan one can avail. If the buyer is planning to sell off the current property to acquire the new one, then what is the resale value of the same.

The budget factor can only lead to identifying one’s requirements and priorities with regards to location, number of bedrooms and amenities that one aspires to have. If the borrower has done his affordability calculation and knows his repayment and other expenses, then only one is technically and financially ready to borrow with full knowledge of his capacity to repay a loan, in addition to any savings one may be using as a down payment. These simple check marks will go a long way in deciding the future home and whether or not you are over leveraging yourself.

Budget segment

As far as the budget segment in a city like Mumbai is concerned, most of the unsold inventory in main Mumbai city is priced over Rs. 1 crore, while the suburbs offer slightly cheaper properties. This price segment is definitely out of the reach of most customers. In order to accommodate potential homebuyers in the city, over the past few years what the developers have done is to reduce the average unit sizes of houses. But even this has not really encouraged an uptick in sales. So, distance from work is also one of the critical factors in assessing the budget for home as transportation cost adds to your monthly budget over and above the EMI.

With most of the demand are stemming in the affordable segment, there are not too many options that customers can choose from at least within city limits – where the cost of land and development premiums do not make it easy to deliver budget housing.

Rohan Agarwal, Managing Director, Geopreneur Group laments the fact that whether it is LIG – Low Income Group, Affordable Housing MIG – Medium Income Group or the HIG – High Income Group, the property starts at Rs. 1 crore upwards to Rs. 40-50 crore. It is safe to say sky is the limit as this city nestles one of the most premium properties of the world.

“I feel the banks should also ensure that the buyer is not over leveraged. Basically, the monthly household expenditure and housing loan EMI should be less than 90 per cent of take home income,” says Agarwal.

Affordability break-up

A study by one of the private banks had earlier assessed that no house can be termed as ‘within the budget’ of buyers if it does not fulfill two simultaneous conditions. First, the cost of the house should not be more than five years of the gross income of the buyers. The second simultaneous condition being that the monthly EMI should not be more than 50 per cent of the gross income of the borrower.

The potential homebuyer can calculate his purchasing capacity based on these two parameters. In Mumbai, going by the majority of the cases, normally one borrows 80 per cent of the cost of the house and hence it is imprtant to calculate the house price index vis-à-vis the affordability on these parameters.

Housing market can be clasified into following budget segments to help the potential homebuyers freeze on his choice:

  • Affordable housing—This segment of housing in Mumbai ranges between Rs. 40 lakh to Rs. 60 lakh and is mostly on the outskirts and far off locations. The homebuyers in this segment must be in the earning range of Rs. 70 thousand per month to Rs. 1 lakh per month to afford it without getting over-leveraged.
  • Mid segment housing—This segment of housing is in the range of Rs. 60 lakh to Rs. 1 crore and as per a ropugh assessment nearly one-fourth of the available properties in the city are in this range. To afford the property in this mid segment the prospective homebuyer must have the monthly earning in the range of Rs. 1 lakh to Rs. 1.75 lakh.  This goes above the per capita income of Mumbai anyways.
  • Upper segment housing—This segment of housing forms most of the available property in the city of Mumbai. The price range of these properties are between Rs. 1 crore to Rs. 2 crore. These properties are available in the main city precincts as well as the far off suburbs. In this category, location can be the USP or the amenities & themes. In terms of the affordability, the homebuyers must have the earning in the range of Rs. 1.75 lakh per month to Rs. 3.5 lakh per month.
  • Luxury housing—This segment of housing has broad range of properties across the city of Mumbai, suburbs and also at the periphery locations. The price range is between Rs. 2 crore to Rs. 10 crore. For a home aspirant in this segment of housing, the earning must be in the range of Rs. 3. 5 lakh per month to Rs. Rs. 18 lakh per month. However, in this segment there is always more down payment and normally the buyer does not borrow up to 80 per cent. There is always an over-supply in this segment of housing even though the demand is subdued, of late.
  • Ultra luxury housing—This  segment of housing in the range of Rs. 10 crore and above leading up to Rs. 50 crore is meant for exclusive few. And hence, the buyers in this category are normally not bothered about calculating the price index vis-à-vis the affordability. Most if the transactions happen with not more than 50 per cent borrowing. But still, going by the conventional wisdom of affrodability, anyone earning less than Rs. 20 lakh a month will not look up to these houses.

The prospective homebuyers can calculate their budget and then select the available properties based on these parameters. The analysts advise prior calculation of affordability to avoid any disappointment or over-leveraging. Know you budget is not just desirable index of housing market but the first and most important aspect for a homebuyer.

By: Ravi Sinha

 

 

Affordable homebuyers must know their wants & needs

Posted on by Track2Realty
Track2Realty Exclusive

Bottom Line: Affordable homebuyers must understand their wants and needs to not get duped by the fancy marketing jargon of builders.

- india realty news, india real estate news, real estate news india, realty news india, india property news, property news india, india news, property news, real estate news, India Property, Delhi NCR real estate, Mumbai Real Estate, Bangalore Real Estate, Pune Real Estate news,Track2Media, Track2Realty, ravi sinha“Let’s face it! We all have unrealistic expectations when buying a house. We often forget about our budget and end up stretching it to fall into debt trap. It happens because we want the best of everything even though we are in the property market to buy a budget home or affordable home. I am not sure to what extent it is human tendency or to what extent we fall into the fancy trap of developers. But today when I look back I think I should have been more realistic when buying my house. There is no point paying almost all the salary in the EMI now,” says a repentant homebuyer in Mumbai.

Well, not many would like to admit it as openly as this homebuyer but the fact remains that the buyers of affordable homes often forget their wants and needs when they enter the property market. The temptation to have one’s home is palpable and many of the first time homebuyers make the mistake of stretching beyond the financial limits.

How many affordable homebuyers who leave to work early morning and come back late night actually need amenities like free Wi-Fi, amphitheatre, club, tennis court, swimming pool etc? Are many buyers in the average salaried class in a position to avail these facilities even though the developer has created e everything within the project? How long such fancy amenities are maintained once the project is over and the monthly maintenance charges are a huge issue?

The critics of this theory might question as to why not the buyers of affordable property be given these amenities. The reasons are many – ranging from the increase in loading percentage vis-à-vis the usable carpet area to cost of maintenance of these amenities every month. In a housing market like Mumbai where the majority of the homebuyers in the affordable segment are expat professionals having both time and budget constraints it simply defies logic to expect fancy amenities.

With the reasonable expectation of a roof over the head not very long ago, the real estate boom in this part of the world has scaled up the liberty of choice for the average homebuyers. While the aspirations of even the middle and lower middle income with moderate budget have gone up, there are very many residential projects launched in recent times that seem to fill the gap with the promise of hi-tech amenities, luxurious lifestyle, lush green surroundings.

Analysts therefore recommend that the average homebuyers must know their budget and needs to avoid the additional financial load. What you may want does not necessarily fit into your budget segment and the quest to have something more is endless. The smart builders do understand this temptation of gullible homebuyers and in the absence of homebuyers’ education in this part of the world their temptation is what sells the fancy marketing offerings of the developers.

Developers, on their part are conscious of this homebuyers’ temptation. The point out that the developers are just catering to what the market is looking for. Harjith.D.Bubber, M.D & C.E.O, Rivali Park agrees that nowadays a homebuyer expects gated community as a part of affordable housing. “External amenities like club house, swimming pool, open areas for children to play, minimum one car parking is the basic expectation of the homebuyer today even in budget housing.”

Parth Mehta, Managing Director, Paradigm Realty, on the other hand, suggests caution when he says that when a person is buying an affordable housing with budget constraints one should keep in mind some basic things. His suggested checklist is more about basic sanctions and clearances than amenities to ensure the timely delivery of the project.

“To invest in a property where developer has complete approval like IOD, CC is more important for someone who is spending his lifetime savings. The title of the property should be clear and marketable. One must also check the credentials and standing of the developer in the market,” says Mehta.

Some of the developers try to find a method in the expectations of affordable homebuyers. They feel it is more to do with how the developers define the demand of affordable housing. Affordable homebuyers too should be given liberty of choice as far as upgrading the lifestyle is concerned.

Nikhil Hawelia, Managing Director of Hawelia Group says there is nothing wrong for a low-ticket buyer to expect the quality experience. According to him, instead of compromising on the quality of amenities that the modern homebuyers want (and often also need) the budget segment should be determined by the distance from the main city and the work place. If one is ready to travel an hour or so for getting a luxurious feel at home, the market should be ready to respond to this set of buyers as well.

“I believe in today’s market place where most of the young buyers are aspirational, even when they have budget constraints, their budget should be a criterion only for location and the size of the apartment. They should not be devoid of modern amenities and that is how a new emerging segment of affordable luxury can meet the market expectations as well during the slowdown. This is how urbanization has evolved the across the world,” says Hawelia.

Analysts for quite sometime are pointing out to mismatch between homebuyers’ preference and the ground realities. While value addition is something that drives homebuyers across the segment of housing, in affordable housing this value addition has an altogether different connotation. More usable spaces, since most of the affordable housing units are smaller in size, is a better value addition than lowering the usable carpet area for the sake of badminton court or amphitheatre kind of fancy offerings. 

As a thumb rule, if the budget is just for the affordable home and the homebuyer is moving from a rented flat to his own, one should first of all look at the location and distance from the work place. Since most of such projects are on the periphery of the city, one must also look for the infrastructure within the project. Usable carpet area is next and the fancy offerings & amenities are definitely the last in the checklist of affordable housing. 

By: Ravi Sinha