When Should You Buy Your First House? | CA Rachana Ranade - YouTube

Hey folks, CA Rachana Ranade here and I  welcome you all to a very important video,  

which is about factors that you should consider  before buying your dream house. Well to be honest,  

I had never thought about this specific video  topic, it was you all who gave this amazing input,  

during my video of when should you buy your first  car and then I thought this is a really wonderful  

topic, let me take this right away . But wait, if  you're first of all confused between whether you  

should rent a house or whether you should buy a  house, this video is not for you. I have already  

made a separate video on whether you should  rent or buy a house, whenever time permits,  

please go through that video as well and not only  can you see the video, the link of this video  

is also there in the I button. Well now that you  have decided that yes, I am going to buy a house,  

then start these questions, as to  what will be the budget of your house,  

loan, down payment and whatnot, all the questions  that we discussed in the pre-bumper of the video.  

So here we are and let me give you that same  knowledge pill and let's continue with the video.  

Let's start with the very first and most important  question as to what should be the budget for your  

house? Is there any thumb rule for that or not,  and answer is obviously yes. The thumb rule goes  

like 5-20-40. Now what is this 5-20-40? Basically  it says that the cost of your house should not be  

more than five times of your annual income right.  Now, what is this 20 if you are taking a loan to  

buy a house, the loan tenure should not exceed  20 years and last what is 40, 40 percent of your  

total income should be the maximum EMI amount,  fair enough. So I hope you have understood what  

is 5, 20 and 40 but wait, now you might be like  Rachana, if my income is let us say 10 lakhs  

now, you are saying 5 ka rule so 10 lakh into five  will be 50 lakhs, in a city like Pune where am I  

going to get a house, a decent enough house at 50  lakhs? So in the case of this video, whenever I am  

going to talk about buying a house, the definition  of income that I am taking is not your individual  

income but, I am taking that as a family income  right. So assume your package is 10 lakh and your  

husband's or your spouse's package is 10 lakh  then, totality of the income that is the family  

income is 20 lakhs multiplied by 5, now the budget  for your house will be one crores. I hope this  

point is absolutely clear. Now let's move on to  another important aspect, if you remember I have  

talked about this rule, many times 50 30 20 rule  okay. Now if you remember, whatever income you  

earn out of that 50 goes for needs, thirty percent  goes for wants and twenty percent mandatory saving  

okay. Now, you might be like Rachana, in the  previous rule, when you said forty percent will  

go to your EMI, now you can imagine, in this fifty  percent bucket, if I put forty percent EMI, I will  

be left with only 10 percent to meet my daily  needs. Now, could that lead to a problem? Yes,  

mentally, basically, no one has stopped you to  shift from here to your but, if you don't want to  

have that mental block as well, what can you do,  please understand. Buying a house, is that a need,  

yes, is that also a want, yes, is that also  an investment, yes. Well even if you're buying  

that as a first house, you can say that  it is an investment in your lifestyle,  

why not, right. So if that be so, the 40 of your  EMI can be divided like 20 percent as a need,  

10 percent as a want and 10 as your savings.  I hope this entire point has given you enough  

clarity on how to budget for your first house.  Well before we move on let me wish you all a  

very happy Independence Day, we are almost at  the brink of celebrating Azadi ka Amrit Mahotsav

Many of us did not get an opportunity to  participate in the freedom of our country  

but, I still believe that many of us still can  participate in achieving freedom, which freedom,  

financial freedom and I believe that learning is  the first step in achieving financial freedom.

Let's vow to learn, invest and prosper and Banaye  Har Ghar Investor. So I am going to facilitate  

this by offering a flat 15 percent off on all  my courses on my website www.rachanaranade.com.

Offer ends on 15th august 2022. So whatever  we have discussed till now, let me give you  

an amazing example so that the entire idea will  be absolutely crystal clear so let us take three  

cases of Mr. A, B and C. Now the family income  on all these three cases is say 12 lakh, 18 lakh  

and 24 lakh, let's take out the monthly income as  well dividing it by 12, these are the numbers for  

the monthly income. We are not going to need them  right now, but let's keep them for the time being.  

Now if you remember, I told you that what  could be the exact cost of the house,  

it could be ideally five times of your income so  simple well like multiplied by five is 60 lakhs,  

same case with b and c, it will come to 90  lakhs and one crore 20 lakhs respectively.  

Now, if you were to go ahead and take a loan to  buy this house, always remember a thumb rule,  

you will get maximum up to 80 percent of the  cost of the house as a loan and balance 20%,  

you will have to do a down payment. So in case  of Mr. A, the 60 lakhs will get split up as 20  

and 80 percent, which will come to 12 lakh as  a down payment and 48 lakhs for the loan amount  

same case 20 and 80 percent will go for Mr. B  and Mr. C. Now, let's come to the EMI amount,  

EMI in our example, I have taken at 7.5 percent  fixed rate, again for your understanding you  

must be aware of the fact that there are  two rates in which we can get a home loan,  

one is known as a fixed rate, one is known  as a floating rate but, if I take a floating  

rate then the calculations can be like really  complex, so for that I have taken a fixed rate.  

One more important point is that, I have  taken the tenure of the loan as 20 years, why,  

remember the 5 20 and 40 rule, exactly for that I  have taken it. So if you have a look at the chart,  

you can see that 7.5 percent for 20 years  for Mr. A comes to 38,668 for b it comes to  

58 0003 and for c it comes to 77,337. Now if I  calculate EMI as a percentage of monthly income,  

for a, I can say I will calculate that as  38,668 divided by 1 lakh and that comes to  

around 39 percent of the monthly income, for  b it is exactly the same and same goes for c.  

All in all I can say that in case of a or b or c,  it is fitting into the 40 percent criteria, but  

then, I am sure you might again have a question  that if this be so, is there any magic trick,  

is there any amazing stat through which I can  get a confidence that yes, I can repay this 20  

years loan in a matter of 10 years and for that  just have a look at this amazing stat. Now let's  

take the example of Mr. A whose loan amount was  48 lakhs, now had he repaid the entire loan with  

the normal EMI amount, he would have been able  to knock off his entire loan in just 20 years,  

but instead of that, had he gone ahead with  another option wherein he would have increased  

the EMI by just two percent, he would have been  able to repay the entire loan in 15.5 years.  

Let me give you another option, had he gone ahead  with a five percent extra EMI then, he would have  

been able to repay the entire amount in just 12.5  years and now comes a magic option. If he had gone  

ahead with one extra EMI every year, he would have  been able to repay the entire loan ideally of 20  

years in just 10.5 years, but this one extra EMI  every year how does the math work for that? Now,  

let's continue with the same example of Mr. a  and let us say that his monthly EMI was let us  

say 10,000 right, so first just to simplify the  example, first I will start with year one. So tell  

me, if EMI was 10,000 how much was the total EMI  that he paid in the year 10,000 multiplied by 12,  

so his total EMI was one lakh twenty thousand, so  total cash outflow is how much, one lakh twenty  

thousand. Now what are we going to do, in year  two, I will say that okay, anyway he's going to  

pay one lakh twenty thousand but, in addition to  that, the previous year's cash flow divided by 12,  

means what one month extra cash flow he has to pay  this year, so previous year's cash flow was how  

much? 1 lakh 20,000 divided by 12 ,so that comes  to 10,000 so this year, A will be paying 1 lakh  

30,000 as the total cash outflow right. Now what  will happen with year three, now let us understand  

see, year three base is now at one lakh thirty  thousand, if he was able to pay one lakh thirty  

thousand in year two, why can't he pay one  like thirty thousand in year three, obviously,  

so now, base of cash outflow is going to be one  lakh thirty thousand ,plus what, one month cash  

outflow of previous year so it is going to be  one lakh thirty thousand divided by twelve.  

Ten thousand eight thirty three, so now the total  will come to one lakh forty thousand eight thirty  

three. I hope you are understanding Mr. A who had  paid just one lakh twenty thousand in year one,  

paid one like thirty thousand year two, is paying  one lakh forty thousand eight thirty three in year  

three. One last example, let's see what happens  in year four. Year four, what is the base now, new  

basis one lakh forty thousand eight thirty three,  one forty eight thirty three divided by twelve,  

yeah eleven thousand seven thirty six  and what will be the total amount now,  

one lakh fifty two thousand five hundred and  sixty nine, all right. So one lakh fifty two  

thousand five hundred and sixty nine will be the  cash outflow for year four and in this way I hope  

you have understood that how his cash outflow is  going to go on increasing year after year and by  

this magic math trick, he will be in a position to  repay the entire loan in just 10.5 years but now,  

the big question is that at the end of 10th year,  you can imagine to what amount this cash outflow  

might have gone to and now you will challenge  me that Rachana, how on earth will that be 40%  

of the total income right, that 5 20 and 40  that 40% rule might not be met but for that,  

I have a counter for you, please understand that  your monthly income or your yearly income is not  

going to remain constant over the period of 10  years. Whatever was your income in year one and  

whatever would be your income in year ten, there  will be a big difference in that as well right  

so I hope you have understood this magic trick of  repaying the loan in just half of the tenure. Now,  

let's move on to the next question is, what could  be the ideal time to buy your first house? Well,  

the simple answer to that is, earlier the better  now why, because right now I told you that your  

repayment of loan, the tenure is ideally going  to be somewhere around 20 years in fact, there  

are certain cases where you can even repay the  loan up to 30 years also, we have not discussed  

about that that in this video but, even if I were  to take 20 years as a time frame you can imagine,  

if a person were to take a loan at the age  of 40 then, what would be his working life,  

that is very limited for him. So his working life,  end of the working life and loan repayment will  

almost coincide, in that case banks might not  be that keen to give loan to a person who is in  

his 40s. Vis-à-vis, if a person is in is in his  20s, then in that case, the working life of that  

person is quite large and banks would be much more  happy and willing to give loan to such a person,  

of course other conditions like his credit score  and all that, that will be checked by the bank no  

doubt about that. Well this in place, now the next  big question is that, how should you finance your  

house? So here, you have two options one is do  a cash down and buy a house oh my god there'll  

be really very few people who will be able to do,  that majority of you will fall in the category of  

taking a loan and buying a house, same what  happened with me when I bought the house right.  

Now what is the biggest advantage, if you buy the  house with entire cash down, whatever is the cost  

of the house will be your actual cash outflow  nothing extra, biggest positive. What could be  

the negative side though? Whatever is your amount  with you, that will be completely blocked or major  

amount will be blocked in one single investment  l that will be a real estate investment and that  

is why the opportunity cost of these funds can be  higher right. Let's go ahead with the loan amount  

or the loan perspective, in that case you'll  have three major advantage, one is the tax angle,  

the second one is a legal angle and the third  one is from a personal finance perspective.  

What is the biggest positive from the tax  angle, number one you get two lakh rupees  

per owner as a tax benefit for the interest amount  and number two you get 1.5 lakh rupees per owner  

from the principal repayment perspective okay so,  two tax benefits. If I am talking about the legal  

point, biggest advantage if you take a loan, what,  see the bank is going to do a due diligence bank  

is going to see whether all the documents are in  place, whether the title is clear and then only  

they are going to give you a loan, so you are very  much having, you are going to have a peace of mind  

when you are taking a loan to buy the house  property. Now if I am talking about the personal  

finance angle, what is the benefit of taking  a loan, first and foremost is that because  

you know that a huge chunk of your monthly  income is going towards the EMI repayment,  

you will be automatically, you'll be frugal  while you know spending for other expenses.  

Number two, important point is that, if you are  repaying your home loans on a regular basis,  

your cibil score will also automatically  improve and number three is that because  

your entire money is not being blocked in a  single investment avenue, that is the reason why  

you will have some funds free to invest in other  investment avenues. What is the biggest downside,  

if you go ahead with a loan, the actual cost  of your house will be way too higher because  

of the interest component of the loan amount.  Let's move ahead with four additional important  

points that you must consider before you're  buying a house property, number one is that  

whenever you finalized any house property  and if that project is registered under RERE,  

I would highly recommend that you go and check  out the website and where you can see a lot of  

disclosures which are mandatory to be given by the  builder. Now I will give you my personal example.  

I had almost finalized a house property and that  builder had told me that, we have a fantastic  

basketball court, this, that all these  amenities inside our society. When I checked  

on the RERA website, I found out that there's  no basketball court which was in the scheme.  

After looking at all these disclosures, I decided  that builder is not very true and honest and that  

is the reason why I cancelled my decision and  I decided to move into another house property.  

Number two, one more very important point is that  if you were to take a decision, whether you want  

to go ahead with an under construction  property or a ready to move in property,  

my personal suggestion would be you should go  ahead with a ready to move in property, why, just  

in case if the builder is not able to complete  the construction in time, in that case you have  

to pay the EMIs, plus you are also paying the home  rent also so, it's a double cash outflow which is  

happening at your end plus the tension of whether  the property will be really completed or not that,  

is extra so again to sum it up, my recommendation  would be go ahead with a ready to move in house  

property and last and the third one is that, you  should ensure that you are having a proper home  

insurance when you are taking a decision to buy a  real estate property. Well, is that all, no, one  

last and important point is that, just have a look  at this, whenever you are buying any house it is  

not only the basic cost of the house but all these  additional charges also which you have to bear so  

keep all these costs in mind and then only take  your final decision. Well, whatever we discussed  

till now, all were the quantitative factors, what  about qualitative factors? So all the factors that  

you have to look at before you buy the house,  the qualitative factors are something like this.  

Well the very first one is emotional security.  I mean those who have been living in an owned  

house since your birth, you will not be able to  understand with this point of emotional security  

but any person who has stayed in a rented house  and has had the pain to change the house after  

every 11 months, can definitely agree to this  point that finally apna ghar apna ghar hota hai.  

So I think that is an emotional point which  definitely gets added up. The second one is  

capital appreciation, if you are owning the house,  then whatever is the case, on an average six  

percent capital appreciation is what we have seen,  that's the kagger of capital appreciation over the  

period of last few years. The third one is that,  finally, even if you are taking a house property,  

with the help of a loan, the moment you are paying  your EMI as and how you go on repaying the loan,  

your equity, your ownership in the  house goes on truly increasing,  

so even if it is taken on loan, finally you are  building an additional asset for yourself and  

last but not the least if you are buying a house  property, there is no landlord hustle otherwise

you have to ask for all small  small things to the landlord  

and then only take a final decision.  I hope with the help of this video,  

you are able to understand all the qualitative  factors, as well as quantitative factors  

once you decide to buy a house, but ,if you still  want to know more about whether you should buy a  

house or rent a house, you can click here and  if you want to know more about stocks which  

are available at great discount, you can click  here. Till then, take care, Jai Hind and bye.

you