Income Scout

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With the housing sector on the upswing, many young professionals are getting tempted by builders’ sales pitch to buy a property. However, interest rates on home loans are now bound upward. Taking on a large liability early in their lives also creates its own issues. Millennials need to weigh the pros and cons carefully before taking the plunge.

“Demand from millennials is up due to the tax benefits. They prefer compact apartments with an extra room to accommodate work from home. Their budgets range from Rs 50 lakh to Rs 1.5 crore across cities,” says Ritesh Mehta, head (west), residential and developer initiative, India, JLL.

EMIs mean loss of flexibility

Purchasing a house early may give you a sense of achievement. Home loan borrowers also get tax deduction on the principal amount of up to Rs 1.5 lakh under Section 80C and on interest payment up to Rs 2 lakh under Section 24.

But an early purchase also comes with issues. Losing the flexibility to change cities in pursuit of better career options could prove costly. If you have to move, you would have to rent your house. Rent doesn’t suffice to pay the EMI. There is the added headache of having to deal with a difficult tenant.

“Millennials must also consider job security: how will they pay the EMI if they lose their job? The EMI burden will also prevent them from taking a break to pursue higher studies,” says Naushad Panjwani, chairman, Mandarus Partners.

Shore up savings

Instead of paying interest on a home loan, it may be wiser to save, invest, and earn good returns from the equity market. “Build a healthy corpus over the initial 10-12 years of your career. Stabilise your career and income first, then buy a house in the late 30s. By this time, you are likely to be surer about the city you are going to live in,” says Panjwani.

Do the due diligence

If you decide to purchase, then fix a budget and stick to it. Don’t buy a bigger house just because one is available. Check the builder’s credentials, especially when buying an under-construction property.

Do some research before choosing the home loan lender. “For new borrowers, the key is to secure the loan amount they need. The interest rate comes next,” says Aditya Mishra, director-home loan desk, 4B Networks.

Adds Chaudhary: “Millennials should compare interest rates, loan-to-value ratio, processing fees and loan tenures of various lenders before applying. All these factors will determine their overall cost of credit.”

Borrow cautiously

With the Reserve Bank of India (RBI) hiking the repo rate on May 4, interest rates on home loans are set to go up. This will add to borrowers’ burden.

“In this rising rate scenario, millennials should select their loan tenure carefully, keeping in mind the EMI they can afford. While a shorter loan tenure will reduce the total interest cost, it will lead to a bigger EMI,” says Ratan Chaudhary, head of home loans,

He adds that lenders don’t like the sum total of all EMIs to exceed 50-55 per cent of net monthly income.

Since we are at the beginning of a rate hike cycle, it is advisable not to commit more than 40 per cent of your salary to home loan EMI.

While choosing the loan amount, keep in mind other expenses and financial goals. “Ensure you have sufficient disposable income after paying the EMI so that you can lead a quality life,” says Panjwani.

Avoid taking a personal loan to make the down payment. This should ideally come from your savings. As far as possible, avoid using retirement funds for home buying.

Create an emergency fund

Unforeseen financial exigencies or loss of income caused by disability or job loss can lead to default on EMI payment. This can in turn lead to penal charges and affect the borrower’s credit score. “Home loan borrowers should include the EMIs of at least six months in their emergency fund,” says Chaudhary.

Pros and cons of a ready-to-move property

Suited for those who need immediate accommodation

Only have to pay EMI, no rent

Details of the house can’t change: you get what you see

Can check out nearby physical and social infrastructure

No risk of delay in possession

However, cost likely to be higher than of an under-construction property