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Home loan rates are low, but can you afford a house now?

Less stability in income earned through employment is going to be the biggest risk buyers need to keep in mind, if they intend to take a home loan

House registrations have gone up across the country. With work-from-home becoming a norm for many of us, there is a temptation to buy a large property, so that you have a spacious home-office a well. But can you even afford a house now?

Work-from-home not permanent

Though the housing market looks attractive, for those moving cities, it may not make sense to buy a property now. “Many young professionals migrate to different cities in search of better opportunities. If you buy a house in a hurry and then migrate to another city, then you may have to bear both the EMI of the owned house and rent payable in the city where you live,” says Suresh Sadagopan, founder of Ladder 7 Financial Advisories.

Buying a large house at a low price in a remote location just because working from home is the norm, may not be a good idea, either. If your employer reopens and insists on coming back to office, then it may not be a wise decision. “Though relatively low housing prices and interest rates call for buying a house for self-consumption, a careful analysis is required. See if the house offers required amenities, space, infrastructure and connectivity to your office. Only then should you go for it,” says Pankaj Mathpal, Founder and Managing Director, Optima Money Managers.

The expenses associated with payment of stamp duty, registrations, brokerage, legal and processing fee of loans, moving into the house are sunk costs and can be prohibitive if you do not hold the property for the long term.

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Stability of income

The disruption caused by the COVID-19 pandemic has impacted the job market. Layoffs and salary cuts were seen across sectors. In the initial phase, the reduction in workforce was caused by lockdowns. However, many of these jobs may never come back, as companies adopt newer technologies and ways of working.

“Less stability in income earned through employment is going to be the biggest risk buyers need to keep in mind, if they intend to take a home loan,” says Suresh.

If your spouse has a relatively stable job, then it may be worth taking the risk.

Emergency funds and other costs

The ‘gig-economy’ has taken roots. “Some of these roles offer relatively better payments for short stints if you have specific skill sets. But there is no job stability or associated benefit,” says Sadagopan. You have to deal with regular EMI on one hand and irregular income on the other. Additionally, you have to pay for costs such as insurance premiums.

You have to rework your entire financial plan if you buy a house by taking a home loan. “Build an emergency fund equivalent to six months’ expenses and EMIs, to cater to any emergencies such as medical issues or job losses,” says Parul Maheshwari, a Certified Financial Planner. If you lose your job or if your income goes down, your EMIs would still need to be paid.

Other financial goals

Vinayak Savanur, Founder and CIO, Sukhanidhi Investment Advisors points out that many home buyers use emergency funds and investments marked for other goals for down payments. “Do not sacrifice your other financial goals. Financial goals such as child’s education and your retirement cannot wait just because you used the money for buying a house,” he says.

Plan your home purchase decision carefully. Using up all your resources for one down payment is too risky, especially in these pandemic times. Savanur says given the low rental yields, it makes little sense to go for a residential property as an investment. However, for self-consumption, a ready-to-move-in property is advisable.

Interest rate risk

Interest rates on home loans are at multi-year lows and negative real yields on good quality bonds make many go for residential properties. However, while taking a home loan, you cannot ignore the risk of rising interest rates. Though experts are of the view that the interest rates may move up gradually despite the rising inflationary environment, they cannot be ignored. “You have to keep some funds in hand or gradually build one to tide over a situation if the rates go up,” says Mathpal. This is especially true for those who take a home loan that is repayable till the age of retirement. The bank generally does not allow repayment period beyond the age of superannuation and the EMI amount goes up or bank calls for some prepayment.

When should you buy a house?

If you can afford the EMIs without compromising too much on your lifestyle, buy a house if you need one. “Ideally, the cost of the house should not be more than three times your annual net take-home salary and the EMI should not be more than 30 percent of the monthly pay,” says Ravindra Deshmukh, Certified Financial Planner, Arthmitra Financial Services. You should ideally pay 25 percent of the house price upfront. Given the high house prices in metro cities, home buyers tend to overlook affordability. But such an attempt can bring in financial instability, as you may not save enough for other goals, he adds.
Nikhil Walavalkar
first published: Jul 9, 2021 09:02 am

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