Important Considerations For First Time Homebuyers

Without a doubt, purchasing a home is a top-priority aspirational financial goal for most middle-income Indians – and this goal has taken all the more precedence with the COVID induced rate cuts taking home loan rates down to multi-year lows. Besides, the pandemic has made a lot of us realize the critical importance of owning our own home – after all, a roof above our heads is the ultimate safety net!

From a Financial Planning standpoint, the act of buying your first home is a pivotal moment in your life, as it’s likely to lock you into a long-term, high-value financial commitment in which you’ll be building up very little equity in the acquired asset for the next several years. If you’re a first-time aspirational home buyer, here are three important questions to ask yourself before you take the leap.

Why am I buying it?

As mundane as it may sound, this is a very important question to ask yourself. Swept away by their aspirations and their desire to ‘keep up with the Joneses’, far too many people end up buying property without really questioning their own intent, only to be afflicted with the infamous “homebuyer’s regret” syndrome later. If you’re leveraging yourself with a 20-year loan to buy the said property as an ‘investment’ simply because home loan rates have fallen 200 basis points due to COVID, it’s a foolhardy step. Your investment is unlikely to provide you with a commensurate payoff even 7-10 years later, and you’re much better off venturing into a portfolio of financial assets. If you’re buying it as an end-user, it’s a noble intention no doubt; but it’s important to ask yourself the next question, that is…

Is this the right time?

It’s important to apply both common sense and use indicators to gauge whether this is the right time to buy your dream home. Measures such as ‘gross rent ratio’ can help point you in the right direction. If the said property is quoting at a price that’s more than 25 times the annual rent, you may be getting a raw deal - and it could make sense to wait for things to cool off further for the next few months, or even a couple of years. The second aspect of ‘timing’ your purchase is your own life stage. Do you expect a sizeable lump sum of money to come your way on the next 2-3 years from windfall profits? Common examples include the maturity of a high value insurance plan, vesting of ESOP’s or the potential sale of a stake in a business that you may have co-founded. Given the current trends in property markets in most parts of India, it may be worth your while to wait patiently and acquire this lump sum of money, in order to maximize your down payment and minimize your leverage. If you’re taking out a high value loan, ask yourself if you’re firmly enough established in your career to be taking such a step.

Will I be compromising on other, more important goals?

Most people do not have a written, structured goal based Financial Plan, and therefore remain pretty much oblivious to how the dynamics of their critical financial goals (such as their child’s education or marriage, for instance) will pan out over the years. Resultantly, they divert their surpluses towards a home loan EMI, first chance they get. Since a home loan EMI is likely to consume your monthly surplus in entirety (and then some!), your other goals might take a backseat for a long time to come. Consider the fact that you’re likely to have exponential income growth between the ages of 40 and 50 (which are the highest earning years for most), and may also receive several lump sum windfall moneys at this stage in your career. From a Financial Planning standpoint, it could make sense to save systematically into more liquid, interest free Financial Assets early on in your life; aiming for a property purchase later – with a larger lump sum down payment, and frequent pre-payments to help you own the property quicker.