The idea of homeownership in India is engrained in our national genes. It is one of life’s ultimate goals for most people. And while those in previous generations bought their first houses quite late in their lives, things have changed a lot in recent decades.
The current generation, aided by the easy availability of home loans, tends to buy a house quite early in their working lives.
Nothing wrong with that. In fact, this way you get to quickly tick the box related to one major life goal.
But the issue is when people are, in a manner of speaking, and knowingly or unknowingly, arm-twisted into going with a house purchase. While renting for extended periods of time in costly locations (to buy otherwise) might be a mathematically wise decision, social pressure due to the idea of ‘renting-is-a-waste-of-money’ generally pushes people into buying.
Taking home loan till recently made sense. But…
To be fair, home loan rates had fallen so much (to about 6.5 percent and even lower if you consider post-tax rates) that there was a case to buy a house due to low loan rates.
But things have been changing now. Policy rate hikes by the Reserve Bank of India (RBI) due to various reasons have pushed up home loan rates to around 8.5 percent for new borrowers. And the possibility of further rate hikes is quite high.
To give you an idea, a home loan of Rs 50 lakh for 20 years that was recently available at 6.75 percent meant an EMI of Rs 38,018, and total interest outgo of Rs 41-42 lakh. But at 8.5 percent, the same loan will have an EMI of Rs 43,491, and total interest outgo of about Rs 54-55 lakh.
So, loan-funded home ownership is no longer a walk in the park, as it used to be.
Let’s now come to the question at hand.
When should you actually buy your first house if you somehow are able to dodge the bullet of social and family pressure?
How to know if you are ready to buy your first house?
Emotions aside, this house purchase decision should be based primarily on two mathematical factors:1. How much down payment can you manage?
2. How much loan EMI can (and should) you service?
1. Down paymentWhen you opt for a home loan, the lender wants you to put in about 20 percent from your side, so that you too have a bit of skin in the game.
So, if you are planning to buy a house for Rs 75 lakh, then you need to arrange Rs 15 lakh (20 percent) as your contribution. This also means that even if you are under some social pressure to purchase a house, you still need to bring in the money.
If in this example, you are unable to arrange Rs 15 lakh and have just Rs 12 lakh with you, then a bit of reverse calculation will tell that the bank will only give you about Rs 48 lakh as home loan. Hence, your home loan budget should be Rs 60 lakh (and not Rs 75 lakh that you want).
2. EMI affordabilityLenders will only give a loan for which your EMIs constitute about 40 percent of the monthly income. And this is across all loan EMIs combined.
So, if your monthly income is Rs 80,000 and you are able to arrange Rs 15 lakh for 20 percent down payment for a Rs 75-lakh house, even then you will have to fulfil the 40 percent EMI/income rule for the lender.
In this case, 40 percent would be Rs 32,000 per month. Assuming a 20-year loan tenure at 8 percent, your home loan for Rs 32,000 monthly EMI will be Rs 39-40 lakh only. So, this Rs 40-lakh loan and your Rs 15-lakh down payment will still not be enough for Rs 75-lakh house.
Bring in more down payment. And / or choose a less costly house to purchase. Most couples where both are earning take joint loans to increase their loan eligibility (and so EMI affordability). That is another popular approach to handle this issue.
Now what are the other factors that decide whether or not to opt for the house purchase via home loan?
Consider the following:
• It’s never a good idea to use up all your savings for the down payment. And that is because you should always have some money set aside for emergencies. What will you do when you need money suddenly for some uninsured expense and you have already used up everything for the house down payment?
• Or imagine what you will do if you lose your job temporarily? Your income will stop, but EMIs won’t. So, you need a savings buffer as a cushion for unexpected events.
• If you are planning to buy an under-construction house, then you not only need to account for the EMIs, but also for the rent that you will be paying till you get possession of the house. This is another factor to consider.
Most people want to buy a house. And rightly so. It does give a feeling of security that isn’t easy to quantify mathematically.But never make the mistake of rushing into the home-buying decision due to social pressure. These people won’t come to pay your EMIs. So, do what you must and when you should. Forget about what others are doing.