Chapter 1: Home buying decisionApril 1, 2019 . Home Buyer's Education Series . 10 min read
Having a home gives a feeling of security. A home is a place to feel safe. Owning a home gives an individual a sense of pride. Home buying is one of the biggest financial decisions anyone makes in their lifetime. As a family’s needs grow, one thinks of buying a home at some point in time. Owning a home gives emotional satisfaction and a sense of social security. Traditionally, home buying has been the preferred investment choice in India. Personality and lifestyle requirements are also likely to influence the home buying decision of a person.
Factors impacting the home buying decision
Some factors that impact the home buying decision are –
- Evolving family structure: Earlier Indian families were joint families living in bigger homes. Due to economic development, people started moving to bigger cities for employment/business opportunities. This has resulted in nuclear families preferring compact homes. Now more and more women are moving out to work in order to contribute towards the family income. This has resulted in higher disposable income of a family, enabling it to choose a better home in terms of size and quality.
- Demographics: The age, income levels and local culture are important factors influencing the housing demands of a given area. Any upcoming business district or financial / Information Technology (IT) hub will create the need for value homes that suit the requirements of a young set of people. The growing demand will lead to a greater return on investments in that particular area.
- Affordability: An individual’s personal down payment capability and how much amount he/she can afford as Equated Monthly Installments (EMIs) will greatly influence their home buying decision. If buyers don’t have the necessary income to pay the EMIs, they will prefer living in rented homes.
- Buying vs renting: Renting is fine if you don’t stay in one place for a long period. In a rented home, you need not bear huge maintenance charges. However, if you are staying in a rented home for a long period of time, chances are that you will be maintaining the rented property in the same way as owning it. So, it makes more sense for you to buy one. Renting does not provide for any return on investment (ROI), buying does. When you buy a car or an air conditioner, it depreciates over the period of time. Whereas, when you buy a home it appreciates over the period of time. As you repay the loan, the burden of your outstanding amount decreases and the value of your property increases. Average home prices go up even in the time of recession.
Buying vs renting
Below is a tabular comparison of whether you should buy or rent a property:
|Having a home gives a sense of ownership & pride. It also gives much-needed security & stability.||Renting a home gives less stability as there is a possibility of being asked to vacate. One has to be very careful and responsible in using the rental property|
|Buying a home comes with the benefit of return on investment (ROI), in terms of capital appreciation, rental income or both.||Renting a home is an expense.|
|On buying, monthly EMIs are eligible for tax deductions.||There are no tax benefits on rental.|
|Buying involves significant costs such as borrowing costs (interest), maintenance costs, registration and property tax among others.||Renting is cheaper than buying as the rent amount is much lower than EMI. One also saves on utility expenses such as property tax.|
|EMIs are fixed. This helps to give a better grip on current and future finances.||Rentals are not fixed. Usually, they increase with every roll of the contract. They are also influenced by economic factors and lead to uncertainty over future financial planning.|
|Real estate, being illiquid investments are difficult to exit. One needs to wait longer to sell the property at the desired price.||Renting gives flexibility. One can change the house if they don’t like. Renting is a good option if one needs to travel frequently.|
Buying a home gives you the power of reinvestment. This means that once you have repaid the entire loan, you can get a fresh loan such as mortgage, business or study loan for your children with the same property. Your home takes care of your future financial needs.
You can manage your own home with the utmost flexibility. You can paint the walls in the way you want. You can modify your home as per your taste and preference. On the flip side, you have to be very responsible while staying in a rented property.
Macro – economic factors that impact the decision
Some macro-economic factors that impact the home buying decision are –
- Interest rates: Any decrease in interest rates leads to lower borrowing costs along with increased affordability and vice-versa.
- Property prices: Any reduction in property prices leads to an increase in demand. A buyers’ market is when the supply of housing units is more than the housing demand and leads to a reduction in property prices. A sellers’ market is when the supply of housing units is less than the housing demand and leads to an increase in property prices.
- Rising income levels: Rising income levels increase the net disposable income of a household and boost the housing demand.
- The Government of the day: The Government of India granted ‘Infrastructure Status’ to affordable housing projects in the Union Budget of 2017, which enables developers in this segment to borrow at cheaper rates such as infrastructure projects. These benefits are getting transferred to the home buyers thereby making home buying more affordable.
Credit – Linked Subsidy Scheme (CLSS)
CLSS is a scheme launched under the Pradhan Mantri Awas Yojana (PMAY) where the government will pay subsidy on the interest payments on the home loan up to a maximum of ₹ 2.67 lakh depending upon the income levels of the family & the size of the property. This amount is paid directly into the loan account of the borrower leading to a reduced loan outstanding and consequently reduced EMIs.
Buying your first home comes with multiple tax benefits. You can avail benefits according to Section 80C, 24B & 80EE. These benefits not only reduce your tax burden but also help you manage your cash flows in a better way.
Under this section, you become eligible for a tax deduction on the amount paid as repayment of principal amount of home loan. The maximum benefit one can claim is ₹ 1.5 lakh per financial year. The tax deductions under this scheme include other investments such as Senior Citizen Saving Scheme, National Savings Certificate, Equity-oriented Mutual Funds, Tax Saving Fixed Deposits and Public Provident Fund (PPF) account to a maximum amount of ₹ 1.5 lakh in any financial year. The deduction as per Section 80C is available till you hold the investment irrespective of the year in which the investment was made. The amounts paid as Registration Fee & Stamp Duty are also covered under Section 80C.
Section 24 B
Under this section, you become eligible for a tax deduction for the interest paid on the loan. Benefits according to Section 24B can be availed irrespective of the kind of loan whether home loan or personal loan. Benefits can be availed on more than one home loan. Interest includes the service fee, brokerage, commission and pre – payment charges. It does not include unpaid interest or penalty. You can have a maximum benefit of ₹ 2 lakh if you hold more than one property. The benefits under this section are applicable individual wise and not property wise.
Section 80 EE
First- time buyers enjoy an additional tax benefit under Section 80 EE. Under this section, income tax deductions can be claimed on the interest paid on the loan. First-time buyers can get a maximum benefit of ₹ 50,000 per year throughout the tenure of the loan. This is an additional benefit over and above the ₹ 2 lakh limit according to Section 24. If you satisfy the criteria for both Section 24 B & Section 80EE, you can claim both the benefits.