This article was published in Live Mint on 10 Oct 2016
I met a lovely couple at a corporate event. The 28-year-old wife and 30-year-old husband were married 2 years ago. Both have management degrees, work in Gurgaon, look forward to a wonderful life ahead.
Last year, they bought their own flat in Gurgaon for about Rs 1.5 crore to make one of their dreams come true. But right now, they are not so happy. In fact, they are distinctly unhappy.
What’s happened is that their home loan equated monthly instalment (EMI)—along with the society maintenance, electricity and other bills—is proving to be too heavy a burden for them to bear.
Almost all of the husband’s salary goes in paying these dues. While the couple is living comfortably, they do not have the money to live it up—eat out, entertain or take vacations—the way their friends and peers do. They feel constrained.
While the home is a source of pride and joy, it is also increasingly looking like a burden they have taken on unnecessarily, too early in their life.
The couple wants to have a baby but feel the wife just cannot afford to leave her job in case she wants to.
They have decided to postpone having a baby. But till when? The home loan EMIs are going to continue for 15 years.
Most of us look forward to the day we can buy our own house. And given the numerous options available in big cities, it is also a desired lifestyle choice for many.
However, in my experience one has to stretch one’s finances to be able to take the decision of owning a home. That almost always happens.
One has to save (forcibly) a tidy sum for the down payment, maybe borrow a little from parents or siblings, and then there is the home loan.
When buying a house, stretch is okay but stress is not.
Stress happens when, like the couple mentioned above, we fall for a fancy property and optimistically go for it thinking we will be able to afford it because we can take a loan and the EMI will not appear as heavy when our salaries go up.
Very often, this decision costs people in two ways—their enjoyment of the present, and their future savings. If the home loan EMI is heavy enough to compress two of your luxury spends (shopping and eating out) and saving for the future (say, having a child or planning for retirement), then it is probably not worth getting into.
Dos and don’ts before buying a house
All young professionals looking to buy a house, must remember that there are many choices available in all budget types.
So, first fix a budget and then go look for what you like. Property brokers tend to show you something fancy and desirable, and probably way above your initial budget.
The second tip is to save up as much as possible in a short period of time (say, 3-4 years) for a down payment. Keep that cash ready before thinking of purchasing a house.
Don’t go in for the maximum loan that the bank says it is willing to give you. Pay 20%, 30% or even 50% of the flat’s price yourself, if you can. Save up for it. You will smile a lot more when the home loan gets over faster.
The third point is the choice between renting or buying a house.
In most cities, the annual rent as a percentage of an apartment’s purchase price is as low as 2-3%. That is very low, especially when you compare it with the interest on the home loan if you decide to buy the same house.
This comparison favours renting, and in a big way, but, yes, there is the psychological positive factor of owning a house.
One of our clients works in Panvel, which is outside of Mumbai city. He is an engineer in a large factory, and has company-provided accommodation to live in at present. He and his wife wanted to own a house.
They purchased a small plot in the outskirts of Ahmedabad (their home town) and built a house for themselves for about Rs30 lakh. This decision was taken about 8 years ago.
They paid approximately 60% of the total cost themselves and took a loan for the balance 40%.
Now the loan is getting over (the engineer pre-paid small amounts from his bonus every year) and they are earning a small rental income from that house. The engineer knows that when he retires, the family can live in their own house.
While the Gurgaon couple are a double-income family, the Panvel-based engineer’s is a single-income household.
The engineer income is less than that of the couple with management degrees, but he exercised his choices in a different way.
He did not have to stress through the entire period of owning a home.
The first home purchase should be for your living and not for investment.
The days when property prices appreciated endlessly, and gave handsome returns over and above the home loan interest paid, are certainly over.
So, think of your present and the future. Most importantly, know that you have choices.