Homing in on bare facts

FISCALLY FIT Q & A A home can be anything from a roof over the head to a luxury apartment …deciding where you live depends on your budget.

I want to buy a flat in Bangalore,for my family and for investment purposes. But I find the going rates (approx Rs. 75 lakhs for new two bedroom apartments) hard to justify and also a bit for a stretch for me, as I am the single earner in my family. What do you suggest?

Ashish Gupta

One alternative that you can consider is buying a used/resale apartment. Just like resale cars, resale apartments are often available at prices that are less than their intrinsic value, thanks to the stigma attached with buying used stuff in our country.

A rational decision maker, instead of being bothered by such superstitions, can take advantage of the situation to negotiate a sweet deal.

In fact, “the charm” of buying “new”, is one of the key attributes that builders exploit to earn high margins. The same charm factor also results in faster depreciation of new apartments during the initial years. Considering the overall lifespan of a building, as long as the construction quality is good, a 10 year old apartment is going to be in no poorer shape (structurally) than a new one. Yet, the former, would be available at a substantial discount.

My wife and I are planning to buy our first home in Chennai. We see that there are two broad categories of apartments. One – apartment complexes with amenities such as swimming pool, health club, video security phone, granite slabs, premium bath fittings etc ˜The other — more functional apartment complexes, with none of the luxury features or fancy accessories. We are not sure which one to choose.

S. Balaji

I understand your dilemma. This is one of the key issues in buying a home. One doesn't really know where to draw the lines between need, luxury and aesthetics. In fact home owners face this dilemma, even after purchasing a home. When you live in a rented apartment you don't spend much on decorating the apartment, because you know that it is not yours.

But when you have your own home, call it nesting instincts or whatever, there is going to be no end to decorating, remodelling etc. ..

If you have the money, it's purely a question of choice about what are the amenities and accessories you want in your home.

But families that take a heavy loans to buy an apartment should keep spending in check. After all, your first objective is to have a home of your own. You can think about converting your home into a palace later, after reducing your debt burden.

A functional apartment is the most cost effective in terms of price per sq.ft. You will also save in terms of not having to shell out additional upfront payment and monthly maintenance charges for common areas and other facilities.

Builders heavily advertise fancy accessories and amenities, because this enables them to charge above-average price and earn higher margins. But as a buyer, you have the option of buying accessories separately, on your own, at any point in future.

When it comes to amenities such as health club, swimming pool , tennis court etc., although it is nice to have them, how often would you really use them? Do you absolutely need them? Are they worth the extra charges? These are some of the questions to ponder on.

A good way to check if a fully loaded apartment is worth its price is to estimate the price of an equivalent functional apartment without all the bells and whistles and then add the individual price estimates of each of the accessories/ amenities offered. Is the extra price justifiable?

A friend of mine claims that renting is the worst financial decision a person can make and buying a house is always better. His argument is that rent is waste of money, since you don't get anything in return. What do you think?

Nithya Sankaran

Well, your friend has a very flawed argument. Unfortunately many people think rent is waste of money. Such people don't mind taking 85% home loan, merely to save on rent, without realising that they'll now spend more money on “interest”.

Let me ask you an analogical question. Is spending on food – a waste of money? Does it make sense to buy a farm merely to save on food expenses? Food, clothing and shelter are basic essentials of leading a life.

Instead of simply treating them as necessary cost of living or running expenses, if one starts considering them as waste of money, there is no limit to the crazy decisions that are bound to result.

Annual residential rental rates in our country hover at less than 4% of the cost of the home – not such a bad deal, you know.

Home loan interest rates on the other hand are at 10% p.a and have hit a high of 15% p.a. in the past.

Buying a home is “good to do” but not a “must” and definitely not at “any cost”. You can think of buying a home, if you have saved enough to pay 40-50% of the cost of the home as down payment.

There are many teaser home loan schemes offered by banks and housing finance companies in the market that offer very low interest rates in the 1st few years. What are the pros and cons of such schemes?

Koushik Ghosh

I think the very categorisation of such schemes as “teasers” says a lot about them! The only benefit of “teaser” rate home loan schemes is lower-than-average EMI in first 2-3 years. On the other hand, the issues to watch out for are many:

Interest rates and hence EMI is likely to increase substantially after the honeymoon period is over.

Borrowers who do not have a fair estimate of the quantum of EMI increase and have not planned for the same, will be stuck with a loan that they cannot afford to service.

Risk of mis-selling of such special “teaser” schemes as “regular” schemes, without highlighting future risk to borrower.

Borrowers who cannot otherwise afford to buy a home, opting to go ahead and stretch themselves a bit, tempted by the present attractiveness of the “teaser” scheme

Remember, taking a home loan is a decision whose effect will last for the next 20 years. It is unwise to make such long term decisions based on short term attractiveness.

What you need to consider is whether you will be able to afford the loan (i.e pay higher EMI) if the interest rate goes up to 12%-13% p.a. after the first 3 years.

The writer is a finance specialist. He can be reached on shyamscolumn@gmail.com or www.shyamscolumn.com