For most of us, the purchase of a home is often the biggest investment of our lives. Caught in the middle of the joy of buying a new property and preparing to tackle its financial implications, a first time homebuyer usually becomes vulnerable to making errors. Here we list a few of the common mistakes that a first-time homebuyer is prone to make and how they should avoid it.
Choosing the wrong home
The easy availability of housing finance has made it a possibility to buy properties at the initial stage of our working lives. At this stage, most of the buyers do not consider old age, disabilities, and sickness while selecting their first home. As a result, such buyers are often forced to sell their property towards the halfway of their lives and buy a more suitable home instead. For example, the absence of an elevator on your third-floor apartment may not be an issue as long as you are young, however, it may not be true when you are 60 years old.
Not checking one’s loan eligibility
Plan your finances and estimate your budget before taking a huge debt. Find out what kind of home loan you are eligible for, and then only after selecting a few potential properties freeze your budget. Read the terms and conditions for payment/ prepayments carefully and also ascertain the applicable penalties and charges in advance.
Over-borrowing to buy an unaffordable property
In the sheer excitement, first-time home buyers often make the mistake of opting for homes that are beyond their monetary capacity. Home purchases are long term commitments and for such a long period your house will not be your only liability. Thus, overburdening yourself will not only be financially stressful but mentally stressful as well.
Not considering miscellaneous expenses
Additional expenses like stamp duty, registration charges often get sidelined but leave a significant impact on the total cost. If your new house is in a gated society you might have to pay extra for maintenance, colony electrical installations in the name of MPEB charges and security charges, etc. Also, if it is a resale property, you may have to spend some money to carry out the repair works. Having a prior estimate of these expenses would be helpful.
Understanding your taxes
Most people do not understand the tax implications, the taxes they have to pay, and the rebates they get to claim while buying a property.
Taxes you have to pay:
Stamp Duty is paid on the sale agreement to render a property transaction legal, and it varies from state to state. As such, stamp duty accounts for around 5-7% of the total property acquisition cost. Most states offer a rebate of 1-2% to women if a property is registered in their name.
Registration charges To register a sale agreement with a government-approved registration officer, buyers have to pay a registration fee of 1% on the total cost of the property at the district sub-registrar’s office.
Goods and Services Tax (GST) The government revisited the tax slab prevalent on real estate and slashed it to five percent for under-construction units and one percent for affordable homes in February 2019. One of the major attractions of ready-to-move-in properties is that they are exempt from GST. Buyers need to only pay the stamp duty and registration charges as taxes.
Tax Deduction at Source (TDS): TDS is levied at one percent if the value of the property exceeds Rs 50 lakh.
Property Tax if the property is self-occupied, then only the annual property tax applies and in case there’s an income generated by a property; it is liable to be taxed.
Tax benefits you can avail:
Section 24(b) If you have taken a home loan for the purchase, construction, or renovation of the house, whatever interest you pay on the principal amount of the loan is exempted from tax payment. The sub-clauses in this category are:
- If the loan has been taken for a self-occupied property, then you can claim exemptions of up to Rs. 2 lakh.
- If you took a loan for purchase or construction (not renovation) of a property before actually buying or completing its construction, you can still claim the interest. You can seek deductions on the interest paid before the construction or purchase is completed, in 5 equal installments, from the year in which the house is bought or the construction is completed.
- If the loan is taken for renovation or reconstruction of a house, you cannot claim tax exemption until the renovation is completed.
Section 80EE provides a deduction of Rs 50,000 against the home loan interest payment for first-time homebuyers. The value of the property should not be more than Rs 50 lakhs and the loan value should not be more than Rs 35 lakhs. Section 80EE offers rebates on income tax on a per person basis and not on a per property basis. This means joint owners who are also the co-borrowers, can individually claim Rs 50,000 as deductions from their respective incomes. Those who live in rented accommodations and claim rebates on tax against housing rent allowance can simultaneously enjoy deductions under Section 24 and Section 80EE. Do note here that the deduction under 80EE can be claimed only after exhausting the rebate under Section 24 (b).
Section 80EEA Additional deduction of Rs 1.5 lakhs (after exhausting the limit under section 24(b)) for first time home buyers, for loans taken for affordable homes up to March 31, 2021. Section 80EEA cannot be claimed with section 80EE.
Not researching about home loans
The interest rate is the key determinant while you pick your lender. However, there are several other aspects involved in this too. Considering that you will spend a large part of your working life in paying off this debt, a home loan product must be picked after doing a thorough research and putting in due diligence. Pick a reliable lender, preferably a bank, and not a housing finance company. Opt for a product that suits your needs.
Do not try doing everything on your own
Home buying is a lengthy process, involving legal and financial aspects. Hence, it may be advisable to hire specialists, to perform tasks where complex legal, technical, or financial knowledge is involved. Hiring a professional for construction works would save you time, money, and effort. Similarly, hiring a lawyer would help take care of all the legal aspects. Recruiting a chartered accountant might be necessary afterward so that you are able to file your taxes and claim the rebates available to you to the fullest.
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