“A small starter home may help you buy your dream house: All you want to know”
- It is better to buy an affordable unit first and upgrade later than stretch your budget for a dream house
- The starter home will fulfill 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
Owning a house is on the wishlist of most people. This wish, however, can lead to trouble, if finances need to be stretched to fulfil it. But postponing the purchase till one accumulates the necessary funds can also be costly. So, what does one do? Well, there’s a third option: affordable housing. A starter home—affordable, smaller—may be a financially sound move. It can also work out to be rewarding compared to living on rent or splurging on a dream house by taking a large home loan.
Know the cost, temper aspirations
In their willingness to buy a house, people often overlook ancillary costs, even though these are 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. Once you have invested in a house, you will also need to furnish it, which also add to expenses. This is why first-time homebuyers should consider buying a starter 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. “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 stretch your budget and take a fat home loan for that ₹1 crore 3-BHK flat. A loan of ₹80 lakh for 20 years at 8.5% interest means an EMI of ₹69,426, eating up ₹86.62 lakh in interest over the full term. Given the high outflow, relative to income, you may have to compromise on savings for other critical life goals till your earnings improve. Instead, if you opt for a less expensive home initially, taking a housing loan of ₹50 lakh to finance it, you will pay an EMI of ₹43,391 per month, shelling out ₹54.14 lakh in interest over the next 20 years. The monthly savings of ₹26,035, if put into a diversified equity fund, could yield around ₹58.32 lakh over the next 10 years, assuming a return of 12%. This amount can be directed towards making a larger down payment for a bigger, better house.
The decision to purchase a starter home should be based on your 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 three to four years, it is better to continue living on rent. “The key is to understand your constraints, both emotional and financial, and then decide,” says Adhil Shetty, CEO, BankBazaar. As 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.
Affordable housing also means several trade offs—home location, amenities, size, etc. While proximity to one’s workplace and sound surrounding infrastructure are important, one can compromise on amenities within a housing society. The trade-off between affordability and utility should be considered when choosing a starter home. “A starter home can be small, but should 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.
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 shifting to a bigger home. One benefit of buying an entry-level starter home is the relatively healthy demand for affordable housing. “Small homes move quite fast on the resale market, so 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.