Ladder7 Financial Advisories

When should you buy your residential home?

It is an article of faith that one should have one’s own residence as soon as possible. There is tremendous pressure in our society to have one’s own house as soon as possible to be considered as having arrived, settled. There is pressure from one’s own parents, relatives, friends, peers, etc. to own a home.

Written by Suresh Sadagopan

We have heard of cases where men who don’t own their own homes are not able to find brides! So, the desire to own a home is deep-seated in our society and not owning one can have serious consequences.

As a Financial Planner, let us answer some important questions.

Popular Reasons for Buying a Home

There are so many reasons which are given to consider buying one’s own home at the earliest possible date. Some of them are as under –

  • People buy homes to save taxes .
  • Instead of paying Rent, one pays EMI.
  • People do not want to keep changing homes every eleven months.
  • We need to pay brokerage & packers/ movers, every time we change homes.
  • When there is a financial commitment like a loan, people save; else they blow up their money.
  • The home they rent cannot be customised & be made entirely suitable for them as it is not their own.
  • One needs to keep changing addresses and informing people/ institutions.
  • Rents keep on going up and eventually would be unaffordable if one does not have one’s own home.
  • Tremendous family, societal & peer pressure to stay in one’s own home.
  • If one does not buy a home now, one will never be able to buy a home.

Are These Reasons Valid?

Let us examine if the various reasons trotted out are really valid to buy a home.

1. Tax Savings

The tax savings possible is about 30%+ of the Rs.2 Lakhs, which is available as a deduction. To save about Rs.60,000 pa as tax, one will end up taking a huge loan.

Considering the prices of homes these days, the loans would be ahead of Rs.50 Lakhs ( in many cases running well above a Crore ). That’s a huge commitment that would go on for maybe a couple of decades. Besides, if one is staying on rent, there is a tax deduction available in such a situation too.

So, tax saving is not such a compelling reason to buy a home.

2. Pay EMI instead of Rent 

Many people justify buying a home saying that they are now paying EMIs for their own home, which will create an asset instead of a rent, which goes down the drain. As financial advisors, we have seen that this argument lacks merit.

If we consider Rent vs EMI for homes in most parts of India, the EMI would be between 3-4 times of the rent for the same home, on an average. So, one needs to pay far more as EMI if one buys the home & starts paying EMI.

3. Changing homes every 11 months

This is a possibility. But, practically, this does not happen. A landlord after having found a good tenant would hardly want him to leave after 11 months. Most people will allow one to continue for several 11-month terms, in their own best interest. This is a clear falsehood used by family & friends to bludgeon a person into submitting to buy a home.

4. Paying Brokers, Packers/ movers 

These are small costs, which in the overall scheme of things don’t matter. Even if these costs are factored in the monthly rentals, it will not push-up the payouts by much.

In own houses too, we pay society charges & property taxes apart from repairs and improvements, which we seldom take into account. In many properties, this comes to quite a packet that needs to be factored when one buys their own home.

5. Financial commitment 

Many people do not save unless they are forced to. Hence, if one has a loan to service, they will be forced to pay EMIs, which will eventually translate into an asset. That may be true. But, one is taking on a huge commitment early on in life and limiting one’s options.

When the career takes them to another city or country, they keep paying the EMI as well as rent for the home in another city. So, it can become onerous – for a lot many people do move about, in pursuit of their careers.

6. Unsuitable living space 

It is true that one may not be able to customise the rented property, the way one wants. However, in many properties, a host of amenities are provided – like a modular kitchen, inbuilt cupboards, air conditioners, etc. This problem can be taken care of by moving into a property which has the important amenities that one is looking for.

7. Changing address 

It is true that one may have to update one’s address with the bank, telecom co, gas agency, electricity utility co, etc. It is a bit of a hassle, but it’s only that – a hassle. Today, most notifications come as emails/ messages & hence physical address change is not that critical any longer. Updating address is also not so difficult any longer.

People also say that if they have to keep changing homes, it disturbs children’s education. That is entirely untrue. When one changes homes, one can easily get a home in the same vicinity. A good broker can ensure that. Hence, children’s education will not be disturbed at all.

8. Rents over time are unaffordable

Rents do go up. But it adjusts for inflation. If one is in service, the income one earns is also inflation-adjusted and hence should not matter. Many landlords quote a 10% increase year-on-year. Some years, that would work.

But if it keeps increasing at that rate, the rents would be out of sync with the market rates & people will vacate and rent out similar properties at a lower rate. Hence, artificially fixed increases like 10% won’t work. The typical rent increases over time are between 5-7%, which is reasonable.

The other argument is that if one does not have a home, over time the rents would be so high, one cannot afford it. Again, this is wrong. If one had the capacity to buy a house early on, it means that the person was able to service a certain level of the loan. The surplus if saved & invested judiciously can also produce passive income. One’s active income plus the passive income will easily help in paying the “very high” rents in the future.

9. Family & societal pressure 

It is true that there is an enormous amount of pressure that is brought to bear on a person, due to which many people succumb. But, this results in something that becomes an albatross around one’s neck. One loses fiscal headroom & the money position becomes quite tight.

Many times, people buy properties they can afford, not what would be happy living in. If on rent, one has the option of living in a property & location that one is happy about. While buying without adequate financial resources, we end up compromising – hugely.

10. Buying a home in the future is impossible 

That is a big lie – told by virtually everyone to hustle people into buying properties.

If a person can take a loan and service that through EMI, it means that the person has that much surplus. In a rent situation, the surplus would be less the rent paid. As seen before, the EMI for a property would be between 3-4 times of the rent, for a similar property. Hence, there will be a good surplus which can be invested. The invested amount accumulates over time and can help in buying a property.

Studies of the cost of homes as the number of times annual income has actually come down, not gone up. This is called affordability ratio. A study by HDFC shows that the ratio was 22 in 1994-95. It has come down to just 4.7 in 2012-13. We don’t have the latest data, but it would have come down even more now as property prices are stagnant or have come down since.

Is buying own residence a good idea? If so, when should we buy?

One may want to buy a property to live in and there is nothing wrong with that. What is wrong is probably the timing of the property buy.

Early in one’s career, it may be a good idea to stay on rent as most people are very mobile and go where their career takes them. Hence, even if they buy a property in one city, they may not be able to stay in it as they may need to move to another city. In such a situation, one will be paying an EMI for one’s own home & rent for the home in the other city. This beats the idea of buying the home for self-use. Also, rental yields are so low in India – less than 2% after society charges, property tax & Income tax – that renting out one’s home is a financially poor option.

Residential property should be bought only when there is reasonable certainty of staying put in that place. This normally happens in the late thirties or early forties & that could be the time to buy one’s residence. It can, of course, vary a bit from person to person, depending on their situation.

Even after careful consideration, things change & it is possible that people may have to move cities. But, to circumvent this, some people keep their families in one place, especially if the children have come to higher classes; the person who is working in another city travels to and fro between cities.

What percentage one should pay upfront & what portion should be as a loan?

Most banks/ Home finance institutions are willing to fund 80% of the property price, it may be a good idea to be able to pay a higher percentage from one’s savings & keep the borrowing as a percentage low.

If a person is buying the property later in life as suggested, the amount of upfront payment can roughly be one half & the other half can be through loans.

People buying very early end up borrowing over 90% of the property cost from banking and other sources. With such high borrowings, money position becomes tight.

During the early phases of life, there are many aspirations one may have – buying mobiles, gifting, holidays, etc. The home would ensure that none of that would be really feasible. Also, one cannot call a property as one’s own, where one’s equity is 10% or less – if that is the reason to buy the property!

Own residence should be bought later in life when one is able to pay nearly half of the property cost & when one is reasonably certain that this is the city & place where they want to settle. Getting carried away and buying properties due to family pressure, wrong convictions, faulty financial ideas – would do more harm than good.

Roam free early on. Let family, peers, etc. not push you around. Settle for a home, only when you are really ready.