Even though this post is specific to Bangalore, the general principles should apply everywhere. I have not included everything related to buying an apartment here like location, security etc. Just those things which are not so obvious to new house-hunters.
Size: Do not buy a smaller unit thinking that you can always buy a bigger one later. Banish the thought forever. If you can’t afford a bigger house now, you won’t be able to do so after 5 years either. Property rates are doubling every two years whereas the salary is not. And once you get settled in a house, it is almost impossible to shift.
Looking ahead 10 years, you’d have kids who would need a room of their own. Your parents might come to stay with you. You might acquire a ton of household stuff which you’d have to put somewhere. So buy the biggest house you can afford. Look for one with atleast 3 bedrooms with a total area of about 2000 sqft. It might pinch a little now but will sure come in handy later.
Built-up area: The area of the apartment quoted by the builder is called super built-up area. This is the area for which you are paying the money. This super built-up area includes the area reserved for corridors, playgrounds, gardens and lift etc. The area in which you actually get to live in is called built-up area which is typically 80% of super built-up area. So if you are buying a 2000 sqft apartment, you get only 1600 sqft out of that. Some builders claim to give 85% but that is the limit.
Loan: This is the one thing that causes most anxiety to new homebuyers. There are many things to be taken care of while taking a loan.
- Pre-EMI: In a typical payment schedule, the bank releases a part of loan, say 10%, at each stage of construction. By the time you take possession, the bank would have paid the entire loan amount to the builder. If the construction takes 18 months, you have to pay the interest for 18 months on the money the bank has released. As and when the bank releases money, the amount on which you have to pay interest goes up. This interest amount is called Pre-EMI.
The alternative to Pre-EMI is to ask the bank to release the full loan to the builder in the beginning itself. Then you can start paying full EMIs to the bank instead of paying Pre-EMIs. Even though paying full EMIs sounds bad when you can get away with paying much less Pre-EMIs, it is actually better and will save you as much as 5 lakhs!
When you pay full money to the builder up-front, you get a discount of 4-5%. This works out to be 1.5-2 lakhs, depending upon the cost of the apartment.
The Pre-EMIs that you pay do not count towards your loan. I.e. they do not bring your loan down. You are just paying a convenience fee to the bank. Most people go for this option ’cause they can’t pay full EMI and the rent at the same time.
- Interest rate: You can go for either fixed or floating rate of interest. Floating rates generally change every quarter but it is up to the bank. Fixed rates are of two types – fixed for a term and fixed for full tenure. The fixed term is typically 3 years after which there is a revision to the rate, depending on the market condition at that time. There are very few banks which offer fixed rate for full tenure. ICICI is one such bank. Some banks like Kotak offer loan with interest rate linked to the Fixed Deposit rate.
You can change your loan from fixed to floating rate later and vice-versa but banks typically charge 0.5% of outstanding principle amount for this. There is one hidden cost though here. Your interest and principle components for EMI would be calculated again and you might end up paying more.
As of Feb 2006, the floating rate is 7.75%, three year fixed is 8.25%, and fixed for full tenure is 8.75%.
- Pre-closure: Most loans last for about 6-7 years even though they were originally taken for 15-20 years. If you get some extra money and want to close off your loan, banks typically charge you 2% of the remaining loan amount. Some banks do not allow you to do this at all. In ICICI, you don’t have to pay any penalty for this if you leave 12 EMIs.
Also check if you can pay more than your EMI once in a while. Banks typically allow you to make excess payments once in a quarter or once in 6 months.
- Insurance: Banks typically fund up to 85% of the apartment cost. Some banks fund up to 90% if you take loan insurance but 90% is the upper limit. The loan insurance premium is typically 8-10k per year. It covers things like disability, unemployment, death, or loss of property due to fire and theft etc. Unlike life insurance, you won’t get anything back at the end of coverage term. You might be better off taking simple life insurance if you are not concerned about job security etc.
- Tax exemption: You get tax benefits on pre-EMI and EMI only in the year in which you are taking possession. See more details here.
- Loan disbursement: All the builders have home loan tie-ups with various banks and they also have loan agents who deal with those particular banks. After your loan has been sanctioned, it takes a lot of co-ordination between the builder and the bank to disburse the money. All this becomes much easier if you take the loan through these builder appointed agents.
Cost: Like there is an ex-showroom price for cars, apartments have an ex-builder price (I just made up that term). A typical price of, say, 2000/- per sqft quoted by the builder does not include charges for Water supply, Electricity, Car parking, Service tax, VAT, Registration, and legal expenses etc. You won’t get any wardrobes or kitchen shelves either. Add 30% of the base cost for these things (total cost now = 2600/-). The builder should be able to tell you exactly how much would these things cost. Your loan eligibility is calculated on the sum total of all the above costs.
Premiums: Some builders, or rather all of them, ask for a premium for corner units or upper floors. In other cities, lower level floors cost more than the higher ones but in Bangalore it’s the other way around. This premium rate is typically 20/- to 50/- per sqft per floor. There is no problem in paying it except that it is not shown in any of the documents. Your house would still be registered at a rate of 2000/- only. See if your builder can waive it off or reduce it; most do.
Amenities: All the apartment complexes are advertised to have a club house, swimming pool, gym, garden, and playground etc. It would be a shame to call that pit a swimming pool but the point here is that you are made to pay for these things. If you are going to buy a house in one of these projects, there is nothing you can do to avoid paying for them. But what you can do is to buy a house in a much smaller apartment complex. These complexes typically have only 12-20 units and don’t have any of the above “luxuries”. You can see these kind of complexes everywhere in residential areas like Koramangala. The prices are about same as big complexes but then you get to live in the city and in a much better locality.
Salespeople: Do NOT trust the marketing executives who take you to the site and give you a tour. They would promise anything just to sell you the damn apartment. Always call up the customer care department and verify it with them. Better still, go to their office and have a look at the papers yourself.
When to buy: This one is simple. Buy it as soon as possible. Buy it now. Don’t worry about leaving Bangalore and going back to your hometown. you can always sell it later. And at a profit too. The best time to buy an apartment is during the pre-launch offer. These offers run for about 2 months and the rates are up to 200/- per sqft lower. As soon as the builder gets the plans approved from the govt authorities (and the project is officially launched), the rates shoot up (and keep on shooting up). The number of units on offer during pre-launch is very less though.
Another thing to note is that builders do not release (put up for sale) all the units once they launch the project. They keep some units for selling them later at a higher price.