Goal-based investing: how to purchase your dream home
This post shows how goal-based investing can help you afford your dream home down-payment and EMI.
This post shows how goal-based investing can help you afford your dream home down-payment and EMI.
Buying a home is one of the most critical decisions in your life. Apart from the psychological aspects of home-ownership (safety, security and stability), there is also the impact on financial life. This post targets anyone thinking of buying a home, typically with a home loan, and lets them check if they can afford it along with their other goals. Goal-based investing lets you figure out how much down-payment and EMI you can afford.
This article is part of our Series on “How to purchase a home”:
Buying a home has considerable costs, some explicit and some implicit. The primary two sources of funding in purchasing a house is:
The primary uses of funds in buying a house are:
Typically, the down-payment amount will cover the first three items, and the rest will come from home loans. Depending on the credit score, profession and number of co-applicants, the bank can give up to 75% of the total cost of the home as a loan. The rest has to come from the investor’s funds.
We are deliberately ensuring that the emergency fund includes 6 months of EMI payment to ensure that in case of a job loss or medical issue, the EMI is not interrupted. This is all the more important in case of pandemic type situations where job losses are likely.
As a pre-requisite, you should now know all your other financial goals and are in a position to start investing. Alternatively, you have been already investing for some time, you want to review progress and wish to understand the impact of a home purchase. If you have not set goals yet, please do so now; otherwise, this post will not be of any use. If you have trouble getting started, read this post.
This post also answers the rent-vs-buy argument from a financial calculation perspective. If you can afford the increased investment starting from today, then your other investments and goals are not impacted and you can buy. Should you buy, in that case, is a personal/family decision. If you cannot afford the increased investment, you should defer the plan of buying a home.
The down-payment can be saved as a single-payment goal as described in this post. This goal will have to be considered along with the rest of your goals to understand the overall impact.
As you pay down the home loan via Equated Monthly Instalments (EMI), other costs need to be considered:
Of these, you will have to offset the saved rent (once you shift) and any benefits from tax saving on the interest and principal component of the home loan.
We will consider a new goal, per year the loan is active, like this:
Cost of goal = 12 times (EMI - Rent_Saved - Tax - Maintenance) - TaxSavings
Using the figures in the worked out example below, for a 10 year home loan, there are ten new goals:
Year of loan | EMI | Rent | Tax / Maintenance | Net Cost/Year = Goal |
---|---|---|---|---|
1 | 88,066 | -25,526 | 3,000 | 7.86 |
2 | 88,066 | -26,802 | 3,150 | 7.73 |
3 | 88,066 | -28,142 | 3,308 | 7.59 |
4 | 88,066 | -29,549 | 3,473 | 7.44 |
5 | 88,066 | -31,027 | 3,647 | 7.28 |
6 | 88,066 | -32,578 | 3,829 | 7.12 |
7 | 88,066 | -34,207 | 4,020 | 6.95 |
8 | 88,066 | -35,917 | 4,221 | 6.76 |
9 | 88,066 | -37,713 | 4,432 | 6.57 |
10 | 88,066 | -39,599 | 4,654 | 6.37 |
We will be investing in these goals using the usual goal-based investing, which has the following benefits:
We will use the Plan Excel sheet to calculate. If you are purchasing an under-construction home with multiple payments made to the builder, you can adjust the charges in the above table.
We will assume a home that costs ₹ 80 lakhs today (including registration, stamp duty and brokerage) and will be bought in five years. The house will be 75% financed by a home loan (₹ 60 lakhs), and the rest will be saved as a down-payment (₹ 20 lakhs). All of these costs will go up over five years at an inflation of 5%. Currently, the family is paying ₹ 20,000 rent/month, which will also increase by 5%, and taxes/maintenance and other costs, less any income tax deduction, will be ₹ 3,000/month.
After five years at 5% inflation, the down-payment will become ₹ 25.5 lakhs, and the loan amount will be ₹ 76.6 lakhs. At a 7% interest rate, the EMI will be ₹ 88,066 for a 10-year loan.
Inflation: the impact on your goals and how to choose assets that beat it
The goal table will be as shown above. You can see these calculations in the homeLoan tab of the Excel workbook. The family has all other goals set and has ₹ 50 lakhs as corpus already saved.
The base case, without home loan, is this:
If you add the home loan, you get the updated figure by setting a value 5 in the cell beside “Home purchase after x years,” i.e. C11.
Points to note:
You should, as a part of your regular portfolio review, look at your home loan at least once in six months. You should check if
If you are getting a better rate elsewhere, consider switching costs and customer service of the new lender.
At all times ensure that you have the following in place
This article discusses how to plan early retirement in the face of lifestyle inflation and lack of health insurance for an investor in their 40s.
Published: 8 December 2024
7 MIN READ
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This post titled Goal-based investing: how to purchase your dream home first appeared on 05 Oct 2021 at https://arthgyaan.com