India is built on the idea that everyone should own their own home. It is one of the most important things most people want in life. People in the past bought their first homes pretty late in life, but things have changed a lot in the last few decades.
With home loans being so easy to get, people in this generation tend to buy a house early in their careers.
There’s no problem with that. In fact, this lets you quickly check off one of your most important life goals.
But the problem is when people are, in a way, forced to buy a house, whether they know it or not. Mathematically, it might make sense to rent for a long time in expensive areas where it would be more expensive to buy, but the idea that “renting is a waste of money” usually pushes people to buy instead.
Getting a home loan used to make sense. But…
To be fair, home loan rates had dropped so much (to about 6.5% and even lower if you look at rates after taxes) that it made sense to buy a house because loan rates were so low.
But now, things are changing. The Reserve Bank of India (RBI) has raised policy rates for a number of reasons, which has caused new home loan rates to rise to about 8.5%. And it’s very likely that rates will go up again.
To give you an idea, a recent rate of 6.75% on a ₹50 lakh home loan for 20 years meant an EMI of ₹38,018 and a total interest payment of ₹41–42 lakh. At 8.5%, the same loan will have an EMI of ₹43,491, and the total interest will cost about ₹54–55 lakh.
So, getting a loan to buy a home is no longer as easy as it used to be.
Now let’s talk about the question.
When should you actually buy your first home, if you can avoid pressure from friends and family?
How do you know if you are ready to buy your first house?
Putting aside feelings, this decision to buy a house should be based mostly on two numbers:
- How much money can you put down?
- How much of a loan’s monthly payment can (and should) you pay?
1. Put money down
When you get a home loan, the lender will want you to put in about 20% of your own money so that you have some skin in the game as well.
So, if you want to buy a house for ₹75 lakh, you’ll need ₹15 lakh (20%) to put down as your share. This also means that you need to make money even if your friends and family are pushing you to buy a house.
In this case, if you can’t come up with ₹15 lakh and only have ₹12 lakh, a bit of backwards math will show you that the bank will only give you about ₹48 lakh as a home loan. So, your budget for a home loan should be ₹60 lakh (and not ₹75 lakh that you want).
2. EMI that you can afford
Lenders will only give you a loan if your monthly payments are equal to or less than 40% of your monthly income. And this is for all EMIs for all loans put together.
So, if you make ₹80,000 a month and can save ₹15 lakh for a 20% down payment on a ₹75-lakh house, you will still have to meet the lender’s 40% EMI/income rule.
40% of this amount is ₹32,000 per month. With an 8% interest rate and a 20-year loan term, your ₹32,000 EMI on a ₹39–40 lakh home loan will only be ₹39–40 lakh. So, even with this ₹40 lakh loan and your ₹15 lakh down payment, you won’t be able to buy a ₹75 lakh house.
Your options
Make a bigger down payment and/or choose to buy a house that costs less. Most couples who both works take out joint loans so they can get more money (and so EMI affordability). That is another common way to deal with this problem.
Now, what are the other things that make people decide whether or not to get a home loan?
Think about these things:
- You should never spend all of your savings on the down payment. And that’s because you should always have some money set aside for emergencies. What will you do if you need money quickly for a cost that isn’t covered by insurance but you’ve already spent all of it on a house down payment?
- Or, think about what you’d do if you lost your job for a while. Your income will end, but your EMIs will continue. So, you need a cushion in the form of savings for things that come up out of the blue.
- If you want to buy a house that is still being built, you need to think about not only the EMIs but also the rent you will have to pay until you own the house. This is another thing to think about.
Most people want to own their own home. And for good reason. It does give a sense of security that is hard to measure in numbers.
But don’t make the mistake of buying a home too quickly because of peer pressure. Your EMIs won’t be paid by these people. So, do what you need to do when you need to do it. Don’t worry about what other people say/do.
