FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Cost of your dream home!
Buying a home is unlike buying any other item. First, this is possibly the most expensive purchase for us and secondly, the pricing structure includes many components thus making it complex to understand. Most of the time, home buyers take a loan to purchase a home and pay EMI for the next 10-20 years. Essentially buying a home can cost a major part of the savings for middle class.
Hence it is important to know what we are paying for. If home buyers are going to spend 30-60 lakhs within a few weeks on home search, selection, and purchase, they should know the pricing structure of their dream home. This will help them understand the cost structure better as well as set the right expectation on future investments. There are three types of cost that home buyers pay. Let’s look at them in detail.
Transaction costs are components of total price that the buyer pays for the transfer of property from seller to his or her name. The components are duties, fees, and any other charges applicable in order to transfer the property. Transaction cost is the significant part of the total cost at almost 10% to 20%.
Transaction cost consists of two major components; statutory fee and professional fee. The statutory fee includes the following components
Ø Stamp duty
Ø Registration charges
Ø Land conversion charges
Ø Transfer & mutation charges, and
The professional charges comprise of the following
Ø Documentation preparation charges
Ø Due diligence
Ø Society transfer fees, and
Finance cost is the cost incurred for obtaining finance from the Banks, HFCs or NBFCs. Finance cost includes the following:
Ø Processing fee to the financial institutions
Ø Documentation fee
Essentially finance cost includes all the costs that buyers incur for the purpose of getting a loan to buy the house. If the buyer is buying a house with upfront cash payment from his savings, finance cost will be zero. This is a very small part of the total cost usually not exceeding 1%.
Cost of property:
The last but most important cost component is the cost of property. This includes the following:
Ø Cost of land
Ø Cost of construction of home
Ø Any other development charges that have occurred in developing and maintaining the property
Cost of property is the largest cost comprising 80%-90% of the total cost.
The same cost structure is applicable to rural and urban areas. The proportion of various costs may vary to some extent depending on population of the area but largely remain the same.
Transaction and financing costs depend on the age of the properties that the home buyer is going to acquire. Typically relatively new properties incur high transaction and financing cost than older properties.
Transaction costs can differ in few cases. Since it is usually higher in new properties, many banks have in-house brokers who can assist potential home buyers in locating their home. These in-house brokers are relatively cheaper. However, home buyers must check the credentials of the broker.
Finance cost varies widely across banks and lenders. Though the proportion of finance charges are much less than that of transaction costs and cost of property, buyers should check this too with different banks. Even if you are able to save only a few thousands, you are still better off.
Transaction through brokers or property developers can be a little expensive than transaction through banks or housing finance companies. The reason is simple. The brokers will charge his or her fee too.
Each cost component has several components under them. Home buyers should check each of the components and the amount of charges against them. They should not assume that the property builder has been charging the market rate.