Money Talk: How to purchase a house in your 20s

Buying a house is the biggest aspiration for an Indian. As per the 2019 Aspiration Index survey, the biggest life goal of Indians between the ages of 22 to 45 is buying a house. Even for Indians in their 20s, long-term goals — which were defined as buying a home and saving for their children’s education — were found to be the most important. Purchasing a house in the early years of your working life seems daunting. With your limited income to combat high costs of living, it is tough to set aside the money needed to buy a home. But this isn’t an impossible goal. If you have made up your mind to be a homeowner in your 20s, here are the steps that will take you there.

BE VERY FINANCIALLY DISCIPLINED

First and foremost, to hit this goal before turning 30, you will need to be disciplined with money through your 20s. This means budgeting every month, spending carefully, and finding avenues to increase savings. So, think fewer restaurant lunches and more home-cooked meals.

A rupee saved is a rupee earned — and you will need every one of those rupees when you are trying to buy a property.

YOU CAN START SMALL

The costs of homeownership in urban areas is high to a point where often it makes greater sense to rent. Your ultimate ambition may be to own a spacious home in a good locality. But finding funds for this dream home is challenging in your 20s. Therefore, do consider buying a starter home — like a spacious 1BHK, or a cosy 2BHK, that fits your budget. Your income will increase with age, and you can always sell your starter home to raise funds for a home upgrade in your 30s and 40s.

SAVE FOR DOWN PAYMENT

The costs of home purchase go well beyond the base price of a property. For example, if you buy an under-construction property, you will have to pay GST up to five per cent. Your stamp duty and registration charges will range from 3-12 per cent depending on your state laws.  For an under-construction property, there will also be charges pertaining to electricity and water connections, club membership, generator charges etc. There will also be charges for sale agreement registration, loan processing fees, furnishing costs, brokerage, and moving charges.

Therefore, your total cost of property purchase can be 120-130 per cent of the base price. Banks will finance around 80 per cent. The other 40 per cent needs to come from your pocket. So start saving aggressively.

ZERO RETURN SPENDS MUST BE CONTROLLED

As a young person with new-found financial independence, you will be immediately drawn towards fulfilling immediate wants: like a bigger TV, or a foreign vacation, or an immediate wardrobe upgrade.

While you should fulfil these wants from time to time, you must understand that lifestyle and consumption spends have no returns — it is money that will not grow. Therefore, those spends will need to be controlled so that you have more money for savings and investments which help your money grow.

BANK YOUR WINDFALLS

From time to time, you will receive an additional income. This could be a bonus from your employer, a wedding gift from your friends, or inheritance from your family. Remember that you have a razor-sharp focus on becoming a homeowner in your 20s. This money, therefore, cannot be squandered. Any additional income you generate should be banked or invested in a manner that hitting your goal becomes easier.

BUILD A CREDIT HISTORY

You will probably need a loan for your home purchase. When you apply for one, your lender would check your creditworthiness through various parameters such as your employment history, income, and your credit score. Today, a credit score of 750 or more indicates that you are a reliable borrower who repays his debts in a timely manner.

You can build a positive credit history for yourself through small borrowings. Transacting through a credit card is one way to do this. With disciplined and regular use of your credit card, you can develop a good credit score in your 20s and have fewer problems when you apply for a big-ticket loan later in life.

GO FOR A LONG LOAN TENURE

A longer loan tenure helps reduce the size of your EMI. For example, Rs 30 lakh borrowed for 20 years at an interest rate of 8.05 per cent leads to an EMI of Rs 25,187. However, if you take the same loan for 30 years, your EMI reduces to Rs 22,118.

While longer tenures lead to higher interest, you can reduce your interest outgo by periodically making pre-payments in tune with the rise in your income.  Buying a home in your 20s isn’t an impossible dream. Financial discipline, regular savings, and a clean credit history will help you get there.

The writer is CEO, BankBazaar.com