Investing in a property is usually not the first money move people go for while starting their career. However, it may sound a bit far-fetched but owning a property in your 20s is probably the best move you can make if wisely planned. At this age, you have time on your side and affording a Home Loan for maximum tenure is possible. With interest rates on a lower side, buying a home on loan would not only get you a good price, but will also inculcate a financial discipline on spending. Assuming you would be relying on a home loan to own a property, you must do simple calculations first – how much you would like to spend(including the value of the house you are looking at), type of loan -Fixed or floating, and ensuring that you get that loan.
Usually banks look for Credit Score of 750+ for granting a loan. It is important to look after your financial health when you are in the 20s. Pay your debts for Credit Cards or Personal Loan on time and regularly to keep your Credit Score healthy.
Why You Should Own A Property In Your 20s
It makes sense to afford a home in your 20s if you have a stable job that allows EMIs. If you buy a home through loan, then you can get the advantage of winning maximum tenure i.e. up to 30 years for repayment. Since tenure is based on the remaining retirement years, bank allows up to 30 years tenure or the number of years to your retirement (60 years ‘Less’ your current age), whichever is less. This would mean low EMI amounts, which are easy to repay. For example, your current age is 23, then the bank will allow you tenure up to 30 years. If your age is 35, then the bank will grant you 25 years tenure (60 ‘Less’ 35). It thus makes sense to take a home loan at an early age.
Let us understand this with an example: A comparison between living on Rent Vs buying a house on EMIs.
Suppose you live in a rented accommodation and pay monthly amount of Rs 10,000 as rent, which increases 5% per annum. Based on this calculation, you would end up paying total rent of around Rs 79.72 lakh in 30 years.
Now if you buy a home worth Rs 30 lakh in your 20s for an EMI tenure of 30 years, then the total amount that you would pay would be around 83.04 lakh (EMI of Rs 23,000, assuming interest at 8.5% p.a.). After 30 years, you would be owner of a house. The Rs 4 lakh paid extra over rent to own a property would provide you the benefit of capital appreciation in the long run.
Buying a home on loan will also keep tax liability at bay. Also, the real estate market is never stable so you may see an increase in property prices if you consider buying a property at a later age. Do note that banks do not provide loan for the entire value of the house, but only 80 per cent of it. So, you have to arrange for the rest of the down payment amount by saving money or investing in instruments like Mutual Funds or Recurring Deposits.
How You Should Go About It
Like any big financial decision, you must assess your preparedness before buying a home. A wrong decision can hurt your financial future. So do assess
- If your job will always be located in the same city where you are planning to buy a house
- If you can afford home loan when you are already dealing with outstanding loans, such as Education Loan or personal loan
Smart Planning To Own That House
Check your existing and expected future expenses as well as income and try to find out the amount you can easily afford without compromising on your financial objectives. Suppose, your estimates say that you can pay an EMI of Rs 30,000 if you take a home loan, then do a reverse calculation as well. This means you should find out the value of a home you can afford if you pay an EMI of Rs 30,000 considering the prevailing interest rate. You can avail a home loan up to Rs 40 lakh (Interest @ 8.5% Pa for 30 years tenure), i.e. property value of Rs 50 lakh considering LTV of 80%. So, you need Rs 10 lakh to pay for the down payment.
Now, you can look for a home at your desired location below Rs 50 lakh value. You must arrange the down payment before you finalise a property. You can reduce the property value if you are finding it difficult to arrange the down payment.
Buying a home also brings in big financial responsibility, therefore you should maintain a financial cushion to avoid a situation of liquidity crunch and financial distress. You should start an investment much before you plan to buy a home to pay for the margin money, and maintain an adequate financial cushion to regularly pay the home loan EMIs.
(The writer is CEO, BankBazaar.com)