EMIs Can Overwhelm Monthly Budgets
AKASH PHARANDE explains some immutable rules of financial planning.
As we know, the COVID-19 pandemic triggered a remarkable shift among India’s middle class when it comes to home purchase behaviour. Typically, conservative middleclass Indians who earlier preferred compact and functional homes started splurging on relatively bigger properties, defying conventional wisdom.
While WFH and online schooling initially drove demand for bigger homes, this trend continued even after the pandemic subsided. There has been a deeper attitudinal shift unrelated to pandemic requirements.
Why bigger homes rule the market
– Lifestyle changes: The pandemic fundamentally altered buyer attitudes and living habits. After discovering the benefits of space and community living during lockdowns, the Indian middle class now sees large homes with amenities as the ideal, irrespective of WFH and online schooling needs fading.
– Demographic shifts: Rising nuclearization, urbanization and higher disposable incomes among middle class Indians also drive demand for bigger homes. Dual-income households want more room – for parents, future family growth and overall comfort.
– Future-proofing: Buyers want homes future-proofed against disruptions like health emergencies. Extra space provides a buffer and flexibility.
– Financial security: In India, real estate is seen as a wealth creator. Big homes equal better financial security and social stature. Unlike smaller starter homes which will later be sold to upgrade to better properties, big homes also represent permanence.
– Competitive pricing: Many leading developers offer large 3 BHKs within budget via competitive pricing and finance schemes, making bigger homes attractive investments.
– Suburbanization: The middle class continues migrating to metros’ peripheries and Tier 2/3 cities where property is cheaper, enabling purchase of bigger homes within budget.
Gradual but marked post-pandemic price appreciation has also encouraged buyers to invest in bigger homes before unaffordability sets in.
Counting the cost
But very few middle class Indian families can afford to buy a bigger home right off the bat. Housing remains the most expensive acquisition most Indians will ever make, and bigger homes cost more.
Typically, in housing projects in a metro city, every additional bedroom costs between 15-25% more than the base 2BHK rate. For example, if a 2 BHK measures 1,000 sq.ft and costs Rs 8,000 per sq.ft, its price is Rs 80 lakhs. A 3BHK of 1,200 sq.ft (with 1 extra bedroom) at Rs 8,000 per sq.ft will cost Rs 96 lakhs, or 20% more.
Those additional bedrooms are definitely worth it. Apart from the sheer convenience and positive social connotations of a larger flat, the extra rooms allow for better utilization per square foot and in terms of rental ROI, 3 BHKs earn anywhere between 30-40% more rent than 2BHKs.
For most middle class Indians, achieving the cherished dream of a spacious new flat calls for a lot of honest introspection, future gazing, and financial planning.
India’s middle income groups typically face multiple financial burdens like education expenses for children, medical emergencies, financially supporting aged parents, etc. Along with these recurring expenses, the high monthly outgo towards home EMIs can overwhelm monthly budgets.
While the dream to own that 3/4 BHK looms large on the family’s horizon, there are some immutable rules of financial planning that must not be broken. The most important one is that the expense on a home purchase should not exceed 35-40% of the total monthly household income. Breaching this limit can leave buyers cash-strapped to handle other critical spending.
Financial steps towards the 3 BHK
Track expenses and build savings: Maintain a record of monthly expenditures across categories – food, travel, shopping, utility bills, etc. This helps identify wasteful spending that can be reduced. Target to save at least 20% of your monthly income for the down payment on your home, and ensure that you always have an emergency corpus to handle contingencies.
Reduce existing debts: Try to close or prepay any outstanding loans for cars, gadgets or vacations. This lowers your obligations and improves eligibility for the home loan.
Pay off expensive credit card bills: Credit card rollovers and revolving debts attract exorbitant interest rates of over 40% p.a. Clear off high cost card dues with savings to free up repayment capacity.
Build a good credit score: Lenders check credit scores to assess loan eligibility and determine interest rates. Scores above 750 help secure cheaper home loans.
Avoid new purchases on EMIs: Adding more EMI commitments when home purchase is on the anvil increases the repayment burden significantly. Defer any major purchases that require loans.
Extend home loan tenure: Opting for a longer tenure of 25-30 years instead of the normal 20 years, reduces the EMI outgo. This makes the home purchase more affordable.
Leverage co-applicant income: Consider including the spouse as a co-applicant for jointly availing a larger home loan amount and increasing repayment capability.
Claim tax benefits: First-time home buyers can avail deductions up to Rs 3.5 lakhs a year on principal and home loan interest under Sections 24 and 80C to reduce tax liability.
With some discipline and smart financial moves, middle income home buyers can realize their aspirations of owning a large home while maintaining a healthy financial profile. Seeking professional guidance from financial planners also helps chalk out the best route to home ownership.
Obviously, owners of an existing home have an advantage as this property, if it is marketable, may be sold to reduce the overall financial burden. The above financial planning steps primarily address the perspective of first-time home buyers focused on acquiring a big apartment.
However, they also apply to existing home owners whose property is modestly-sized (and therefore in less demand) and/or in a very old project with very few of the modern trappings of more contemporary housing projects.
In a market where bigger, modern homes rule the demand wave, selling smaller, older properties may only help marginally in offsetting the cost of a spacious new apartment. Financial savviness and discipline can go a long way in narrowing the gap to make the dream of a spacious new home more attainable.
About the Author:
Akash Pharande is Managing Director – Pharande Spaces, a leading real estate construction and development firm famous for its township projects in West Pune and beyond. Pharande Promoters & Builders, the flagship company of Pharande Spaces and an ISO 9001-2000 certified company, is a pioneer of townships in West Pune.
