Deciding to purchase your first home is a significant milestone, filled with both excitement and complexity, especially when navigating the fluctuating landscape of interest rates and real estate prices. Many prospective homeowners grapple with the decision: should you buy now or wait in hopes of lower interest rates?
This question, while important, overlooks the broader financial landscape that encompasses down payments, stamp duty, existing liabilities, and the pivotal role of your credit score.
Financial readiness over market timing
When considering a home purchase, particularly one as substantial as a ₹2 crore property, the initial focus should be on securing the necessary down payment. According to guidelines set by the Reserve Bank of India (RBI), borrowers are expected to provide at least 25% of the home’s value upfront for loans exceeding ₹75 lakh. This means for a ₹2 crore home, a down payment of ₹50 lakh is required, not including additional costs like stamp duty and registration fees, which could add approximately ₹14 lakh to your initial outlay.
The role of existing liabilities
Beyond the down payment and upfront costs (EMIs, etc…), a thorough assessment of your existing financial obligations is crucial. If a significant portion of your income is already dedicated to other debt payments, consider delaying your home purchase. Reducing your debt not only improves your financial flexibility but can also make you eligible for more favourable loan terms.
The importance of your credit score
Your credit score is a critical factor in the home loan process, influencing both your eligibility and the terms of your loan. A strong credit score signifies to lenders that you’re a responsible borrower, potentially leading to better interest rates and loan conditions. If your credit score is less than ideal, taking time to improve it before applying for a home loan can be a strategic move.
Considering interest rates and real estate prices
While the allure of waiting for lower interest rates is understandable, it’s essential to recognize that real estate prices tend to appreciate over time. This appreciation could negate any potential savings from a reduction in interest rates.
For instance, if you’re contemplating a ₹2 crore property, a delay in purchase hoping for a 50 basis point decrease in interest rates might result in the property’s value increasing beyond the savings achieved from lower rates. With current rates around 8.5%, the decision to wait could lead to purchasing a more expensive home with a higher loan amount and monthly instalment, despite a marginal decrease in interest rates.
In conclusion, the decision to buy your first home hinges on more than just the anticipation of fluctuating interest rates. It requires a comprehensive evaluation of your financial readiness, considering your ability to manage the down payment, existing debts, and the health of your credit score.
While market conditions will always play a role in the timing of your purchase, the foundational question remains whether you are financially prepared to take on this significant commitment. Ultimately, the right time to buy is when you find a property that aligns with your needs, financial stability, and long-term goals, ensuring that your first home is a source of joy rather than financial strain.
Chakravarthy V. Co-founder and Executive Director at Prime Wealth Finserv
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Published: 15 Feb 2024, 09:54 AM IST