A reader who prefers anonymity asks, “Sir, I am a big fan of your articles. Thanks to you, we have started investing in a goal-based manner. We are not yet investing as much as we should for these goals. We live in rented accommodation. My husband wants us to buy a house as soon as possible. This would mean a further decrease in our investments. I would like to delay the house purchase a bit longer. I am not sure what to do. Is my husband right? Can you please advise?”
Buying a house is a highly emotional decision and depends on our experiences. There is, of course, nothing wrong with making emotional decisions as long as we do not rush into it and take a holistic view first. To clarify, “buying a house” in this article only means “buying a house to live in” and not letting it out to rent.
As a kid who spent the first 14 years of my life in a bungalow/mansion and was forced to abandon it for a flat, I can empathize with the urge to own a roof (at least a part of it). Growing up, I was also surrounded by relatives who lived in rented matchbox-style houses in Triplicane/Parry’s areas of Chennai. I knew how they felt and when their kids grew up, the first thing they did was to get a house.
Yamini Sood, senior VP DSP MF argues that buying a house is more important than investing or building wealth as it is an animal instinct in this fantastic post: Home IS where the holy grail is.
Let us first consider the general pros and cons of buying a house early.
Buying a house as soon as possible
pros
- A sense of security. Peace of mind to focus on other issues. Those who are well educated, skilled and with a reasonable chance of income growth can opt for this.
- A home is a utility when lived in and an asset if we choose to sell it (either in one shot or via a reverse mortgage). While reverse mortgage eligibility diminishes for early purchases, a home can always be sold for a decent sum of money to fund retirement or other goals.
- We get satisfaction (true or otherwise) that by buying early, we will not have to pay more if the purchase is delayed.
cons
- The sense of security might result in not having enough money to fund other goals and aspirations. This implies working for more years. Being chained to the desk (although most people do not recognise this).
- If a person’s skills are not indispensable, they face the prospect of job loss or low-income growth.
- We have emotional strings attached to a house. Many people view it as a legacy and want to leave it to their children (in the hope that they will take care of them in old age). A house is an asset only if we wish to sell it at the time of need.
- Logistics matter the most when it comes to a house purchase. A 1000 sq ft flat in a well-developed area of a city could be more valuable than a 3000 sq flat in the outskirts built in a marshland. An emotional/hurried purchase can blind us from these aspects.
- The prospect of changing jobs, cities and even countries can complicate matters.
Buying a house later
The idea here is to consider house purchases only after we are firmly established in our jobs or career.
pros
- The EMI could be lower if we decide to build a corpus for partial down-payment
- If we recognize the need for investing early and investing right, goal-based investing would be on auto-pilot by now
- delaying can sometimes get us a better deal as we may be in a better position to judge.
- They can get a better reverse mortgage deal as the residual life of the property would be relatively higher.
cons
- prices could shoot up; interest rates could be higher
- Getting a home loan later in life implies we are chained to our desks for longer.
- The probability of job loss, lifestyle diseases etc., is higher.
Now let us try and come up with a generic “if-then” combination for buying a house early. “you” in the following sentence refers to a couple if relevant.
If you feel strongly about sleeping under a roof that you can call your own, and if you are qualified enough or have the skills to be continuously employed with reasonable salary growth, then you can consider buying a house asap, provided the EMI outgo each month is not more than 40% of your take-home.
The ideal mix is,
- expenses = 30% of take-home pay
- EMIs (home loan + car loan + …) = 30% of take-home pay
- Investments = 30% of take-home pay
- emergency fund = 10% of take-home (in addition to a separate stash).
The EMIs can go up to 40%, reducing investments by 10%. A EMI higher than this is unhealthy and should be avoided. Investing and accumulating a down-payment corpus would be better to reduce the home-loan burden as soon as possible.
The EMI can also be lowered by choosing a longer home loan tenure as long as both partners continue to work.
The goal should be to find “some sort of balance” among expenses, EMIs and investments without feeling suffocated by the loan burden. For a more complete framework, see: How to buy a house with a home loan: Tips to maximize benefits.
Once the EMI deductions have started, continue investing as much as possible. Do not try to aggressively pre-close your home loan. It is unnecessary unless there is a special work or health-related reason for it. As your income increases, pre-pay the home loan in small chunks. Focus on investing for long-term goals. See: Why this Kolaveri to pre-pay home loans?!
In summary, the couple can take a chance and buy the house asap as long as they have stable jobs with reasonable salary growth. They must, however, ensure the EMI does not exceed 30% to 40% of their total take-home pay. Finding a balance between needs (expenses today and investments to handle expenses tomorrow) and wants (emotional desire to own property) is crucial.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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