Buying your first home — It’s not an Investment but Financial Discipline

TownSIP Research ~ 15 min read

A lot of times, we wonder when the best time is to buy a house. Factors we generally consider are – is this the right time, am I getting enough returns, should I wait further, and prices might come down?

Let us try to discover answers to these important questions for first time home buyers, especially salaried class.

If you are a salaried person and looking to buy your first house, TIME IS ALWAYS RIGHT. One needs to look at other factors like their own affordability of down payment, EMI, location rather than the timing of buying a house, and trying to calculate what returns one will get on the property.

In India, most of the time the social thought process is that taking a loan is not good and one should always remain debt-free. A home bought by taking a home loan is always a great investment. We often miss out on small factors like the home loan is the cheapest form of loan available to an individual and it also provides maximum relief on income taxes to the salaried class

For salaried class, it’s best to buy a home as early as possible in their career as it helps with the following:

  • Brings in financial discipline
  • Builds a large size asset, which otherwise one cannot build using the cheapest form of borrowing available. The asset size is typically ten times your annual income, in the year you buy.
  • Provides maximum savings to income tax
  • Takes care of real estate inflation index in future

Let us try to look at the above factors using a simple example.

Shyam is a salaried person drawing ₹ 50,000 per month in the year 2009. Shyam has the following expenses:

  • Monthly household expenses — ₹ 10,000
  • Existing savings/SIP — ₹ 5,000
  • Extra money/contingency plan for every month — ₹ 10,000

The same is shown in the below table

With respect to the above income and expenses, Shyam can easily afford an EMI of ₹ 20,000 — ₹ 25,000 per month. By paying this EMI, the approximate value of the house Shyam can buy is ₹ 36 lakhs. (This is a very good amount to buy a good flat in 2009 in a good locality in a city like Pune)

If Shyam buys this property in 2009, Shyam is easily able to build an asset of 36 lakhs which is approximately 6 times his annual income using the cheapest form of lending. Let us try to analyze this by taking an example in Aundh locality in Pune. The data is actual data of property in Aundh from 2009 till today.

As per the table, you can see the EMI today Shyam has to pay considering his today’s income for the same property will be 82% of his monthly income which means the property which is within his reach in 2009 has become unaffordable. The later Shyam buys, the same property becomes unaffordable for him. The below graph shows how EMI increases at a much faster pace than his monthly income.

If Shyam would have considered buying a home as pure financial discipline early in his career he would have built a nice asset. Shyam cannot buy this property today, but he MUST look at similar opportunities within his budget elsewhere.

Key Takeaways

If one buys home early, it helps in taking care of inflation and pinches less. Early in your career, your liabilities are low. Keeping these factors in mind, we must consider buying a home by taking a home loan as a necessary financial discipline

  • Early in a salaried employee career, liabilities are low
  • A home loan is always the cheapest form of borrowing money
  • Borrowing money to take a home loan is financial discipline and one should plan the amounts well
  • Salary will increase year on year, but EMI will mostly remain the same. Even if interest rates increase, you can always increase the duration and keep the EMI constant
  • Price of the house might increase at a faster rate than your salary increments
  • Home loan easily building as an asset of 6–10 times your annual CTC today and is taking care of real estate index inflation.

Remember,

Looking at the above factors and data points, we really don’t need to worry about buying our first home by borrowing a home loan. Buying a first home for the salaried class is not an investment but a financial discipline.

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