Viraj Khatavkar
Should You Buy a House

I have a friend who bought a house for around one crore rupees. He is married with one kid and travels every day for two hours to his work. More than half of his salary is spent on EMIs, and most of the wife's salary is spent on household stuff, child welfare, etc. They have an asset of one crore but very less cash or other liquid investments in case of a prolonged emergency. This is a couple whom I would call "House Rich, Cash Poor" I sometimes wonder whether it is worth the emotional stress to have a place that we can call "our home" but always be stressed about our finances?

How Much You Pay on a Home Loan

Whenever we go to a bank inquiring about a home loan, they never tell us how much in total we are actually paying back. We hear only about the monthly EMIs that we are going to pay and for how long we would be indebted. For example, an EMI of 35,000 for thirty years.

Before answering the obvious question of "Should I Buy a House?" we should first understand what we actually pay for a house on EMIs. If we take a home loan of 50 lakhs for thirty years at an interest rate of 8 percent, here's how much we actually payback to our banks:

As we can see above, for a home loan of 50 lakhs, we are paying back about 1.32 crore in totals. The total interest we pay is a staggering 82 lakhs, which is higher than our principal and forms about 62% of the total amount paid back.

Alternatively, if we invest that 35,000 per month for the next thirty years, then even at a rate of return of 10 percent per year, our investment would grow to around seven crores.

Other Hidden Costs

What we pay for a house is not the only cost to pay. There are always some additional costs that we incur whenever we have our own home:

  • Maintenance every month. If we own an apartment of 1000 sq ft, we have to pay a monthly maintenance of around 9,000 rupees.
  • Costs for furnishing the house initially with interior design work, furniture, utilities, etc
  • Re-furnishing and taking care of a house every three to five years
  • What if you get a job in another city, and the rent doesn't cover your EMIs?
  • The rental yield in India is around 2-3 percent while an EMI is approximately 7-8 percent so the rent would never cover your EMIs
  • What if you are tired of traveling and want to move closer to your workplace?

These are just some of the questions that we need to answer about the extra hidden costs that we pay if we have our own house.

My Take

Does it make sense to put all our hard-earned money and a significant part of our salary into a house at a young age when we should be investing that money? There is no definitive answer, but this a good question to think over. Don't try to listen to your parents or in-laws or other relatives in getting pressurized to buy a house. Do you really need a home? Are you comfortable with so much debt? Is this really your decision? Think for yourself.

Here are a few things that I consider whenever for making this decision:

  • Am I confident and happy enough to settle in this city for the next 20-30 years to invest in a house? Don't think in terms of your job location.
  • Do I have enough money to put as a downpayment? I personally wouldn't buy a house unless I can put a minimum of 50% as a downpayment.
  • Can I afford these hefty EMIs? I wouldn't pay more than 25% of my salary in EMIs. The more we pay in downpayment, the lesser the EMIs.
  • What if I lose a job? Or get permanently injured? What if my other half wants to stay at home and not do a job?

Renting solves most of the problems stated above. The rent we pay is half of the EMIs in a decent city in India. Further, we don't have to pay any maintenance costs if we are renting.

For my personal home, I'd buy it whenever I can pay around 60 percent in downpayment. My dream is to buy a house without a loan. My goal is to retire by 38, which means I'd probably buy a house when I am between 35-40 years of age. Money is not the only thing that is stopping me from buying a home. I can buy a house today if I want and easily afford those EMIs. But I am not sure about the place where I want to settle for the next thirty to forty years of my life.

We all crave a place that we can call "home" It's very emotional, and I totally understand it. I want to have my own house someday, but definitely not today. There is a time to buy a home. It is different for everybody. For some of us, it might be when we are young, while for others, it might be later.

To conclude, on a purely objective perspective, I'd buy a house when:

  • I can pay 60 percent in downpayment
  • EMI is no more than 25 percent of my monthly income
  • I have a minimum of ten years worth of expenses in other liquid assets to take care of any emergencies
  • When I am entirely sure that I'd like to settle in a place for the next 20-30 years

Do you own a house, or are you planning to buy? Have more questions? Write to me.

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I’m on Twitter, @virajkhatavkar

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