Owning a house is on the wishlist of most people. This wish, however, can lead to trouble, if people stretch their finances to fulfil it. But postponing the purchase till one accumulates the necessary funds can also be a costly proposition— besides being frustrating.
So, what does one do? Well, there’s a third option: affordable housing. A starter home— affordable, smaller—may not offer all that you had fancied in a house, but purchasing it can be a financially sound move.
It works out to be rewarding compared to living on rent or splurging on a dream house by taking a large home loan. What makes the proposition even better is that the government has incentivised purchasing affordable homes for first-time buyers.
Not only can homebuyers avail of interest subsidy on housing loans, the tax on under-construction houses has also been substantially reduced. With these concessions in place, even the mid-range housing segment has become quite attractive.
Buy a small home or live on rent?
Over a 7-year period, a starter home would be worth around Rs 85.4 lakh, while the person staying on rent would have amassed Rs 71.1 lakh by investing the savings on EMI and downpayment in an equity fund.
Rs 14 Lakh Is what you stand to gain buy buying a starter home compared to living on rent
*Sum that would have gone as downpayment towards home is instead invested in an equity fund. Figures for rent and home cost are based on current rates at Hirandandani Estate, Thane, Maharashtra.
Know the cost, temper aspirations
In their willingness to buy a house, people often overlook ancillary costs, even though these are quite substantial. “The overall cost of a house is not just the amount that you pay to the developer,” points out Rohan Sharma, Research Head, Cushman & Wakefield India.
While one-time additional costs in the form of stamp duty and registration fee can add 5-6% to the acquisition cost, numerous recurring costs can put additional burden on a homebuyer’s already stretched finances. Housing projects also usually ask you to shell out a tidy sum towards monthly maintenance charges. There’s also the added expense of property tax and home insurance premiums. Once you have invested in a house, you will also need to furnish it, which, again, can be a huge expense.
Benefit from the credit-linked subsidy scheme
The scheme will bring down the EMI burden on both low and middle income groups.
This is why first-time homebuyers should consider buying a starter home which meets their immediate requirement and won’t burn a hole in their pockets. Nandan Piramal, Director, Sales and Marketing, Peninsula Land, says: “A starter home is easy on the pocket as its home loan EMIs are relatively affordable compared to those of an expensive dream home.”
The starter home will fulfil your immediate need to stay in your own house while also allowing you to plan for your dream house over the next 5-10 years. “You can buy a small, compact home if your income is modest, and it can be sold later to upgrade to a larger house, when your income has risen,” says Anuj Puri, Chairman, ANAROCK Property Consultants.
To illustrate, suppose you decide to stretch your budget and take on a hefty home loan for that Rs 1-crore 3-BHK flat you covet. A loan of Rs 80 lakh for 20 years at 8.5% interest would translate into EMIs of Rs 69,426, eating up Rs 86.62 lakh in interest payments over the lifetime of the loan. Given the high outflow, relative to income, you would likely have to scrimp for a few years and compromise on savings towards other critical life goals till your earnings improve.
Instead, if you opt for a less expensive home initially, taking a housing loan of Rs 50 lakh to finance it, you will pay an EMI of Rs 43,391 per month, shelling out Rs 54.14 lakh in interest over the next 20 years. The monthly savings of Rs 26,035, if put into a diversified equity fund, could yield around Rs 58.32 lakh over the next 10 years, assuming a return of 12%. This amount can possibly be directed towards making a larger down payment towards a bigger, better house. But it’s not just your mortgage payment that will be lower because of the lower price tag of the starter home, all the ancillary costs will also come down, giving you much more breathing space.
Buyers keen on smaller homes
Citywise preferences of prospective buyers of residential property across price segments.
Source: ANAROCK Indian Real Estate Consumer Outlook Survey H2 2018
Starter home is not for everybody
The decision to purchase a starter home should be based on your specific life situation. For instance, if you think it will take you at least five years before you can purchase a bigger home, it makes sense to buy a starter home in the interim. But, if you are not likely to stay in a starter home beyond 3-4 years, it is better to continue living on rent till you purchase your dream home. “The key is to understand your constraints, both emotional and financial, and then take a decision,” says Adhil Shetty, CEO, BankBazaar.
Mumbai: No growth in sales over past four years
Keep in mind, even at lower cost, buying a starter home will eat away a chunk of your liquidity. Often, for comparable properties in the same location, the rental values are 40%-60% lower than the home loan EMIs you would have to pay if you purchase the property. “If one does not place any particular value on home ownership and wants to remain flexible with where and how one lives, then a starter home makes little sense from an investment perspective,” says Puri.
Delhi NCR: Housing project launches fell 29%
Remember, a starter home works well when the EMIs for such a home are not much larger than one’s rental outgo. “One should plan a house purchase based on current income levels and keeping in mind that future expenses in other aspects of life are also likely to go up,” stresses Sharma.
Encouragingly, the affordability of smaller homes has improved significantly compared to few years ago—growth in household income too has outstripped growth in housing prices. But affordable housing means several trade offs—home location, amenities, size, etc.
“Based on the main items on your checklist, you should prioritise the key elements when opting for a starter home,” says Sharma. While proximity to one’s workplace and sound surrounding infrastructure are important, one can compromise on amenities within a housing society.
Bengaluru: Unsold units rose 16%
The trade-off between affordability and utility is one that should be carefully considered when choosing a starter home. “A starter home can be small, but should ideally be located in a growing area. In other words, it is not necessary for all social and civic infrastructure to be in place at the time of purchase, as long as there are reliable prospects of it developing over time,” says Puri.
Pune: No growth in new launches
Hyderabad: Sales rose by a huge 28%
Faced with a choice, it is better to go for a smaller unit size than sacrifice the convenience of location and quality of construction, say experts. “Just because it is an affordable home doesn’t mean that you should have to compromise on the quality of a project,” says P. Rajendran, Senior Vice President Marketing, Tata Value Homes.
For instance, if you are buying an older property, conduct basic checks on the building structure, plumbing and wiring. Also check if it has sufficient car parking space and security services, says Shetty. “If you are not able to find a right mix of tradeoffs, you may be better off with a rented apartment,” he adds. For example, even if a home has all the amenities and features you want, but it’s really far away from your workplace, you may be better off with a rented property closer to your office.
Chennai: Unsold units rose 16%
Kolkata: Sales fell 18%, new launches by 10%
Exit strategy is a must
When identifying a starter home, it is critical that you have a plan on how to offload the property when the time comes to shift to a bigger home. One benefit of buying an entry-level starter home is the relatively healthy demand for affordable housing. In most areas, prices for entry-level homes are likely to remain on an upward trajectory. “Small homes move quite fast on the resale market, so the second part of the plan (selling it at a favourable price to finance the purchase of a bigger house) usually works out very well,” says Puri.
But don’t be in a rush to sell. An investment period of around 5-7 years is needed, if you wish to gain from the investment, say experts. This is why the location of the starter home is critical to selling or letting it out when you choose to buy a new house. “The location should promise economic growth,” says Girish Shah, ED, Marketing and Corporate Communications, Knight Frank. Buying a property from a reputed developer will make its resale easier, he adds.