Why buying a house early in career can hurt your financial well-being

Perhaps, the single-largest outlay for most of us is directed towards buying a house – mostly an apartment.

And post-Covid, there has been a propensity among many of the young in the workforce towards buying their own ‘spacious’ houses early on in their careers.

Recent studies by real estate research firms and home loan providers indicate that the average age of home loan customers has fallen from 40-45 years a decade ago to the early 30s and often to the mid- or late-20s.

From a traditional societal viewpoint, we are often asked to ‘settle down’ quickly and one of the gauges for doing so is owning a house.

But from a financial wellness viewpoint, is it a good idea to buy a house with a loan within a few years of starting your working life?

From a financial and even practical standpoints, buying a house in the early years of your career may not be a sound decision.

EMIs create cash crunch

With back-to-office becoming the norm, typically, most of us would like to buy a house as close to our office as possible, so that the commute time is reduced.

But the catch here is that the apartments that are, say, 30 minutes or less away from your workplace are likely to cost more.

Even modest-sized apartments that are relatively nearer to office spaces and IT parks in the top 10 cities in India are likely to cost a lot – usually north of ₹1 crore.

Let’s assume that you somehow zero in on a property – new or second-hand – that costs ₹1 crore (including all taxes and registration charges) and is ready for occupation. Delay in handover from builders is another problem, which we ignore for our discussion.

Now, banks offer 80-90 per cent of the property’s price as loan, which translates to ₹80-90 lakh in this case.

To be eligible for the loan amount in the range mentioned above, your net monthly salary must at least be ₹1.2-1.25 lakh.

Let’s further assume that you have done well in your career thus far and earn that kind of money.

If you avail a loan of ₹85 lakh (85 per cent of the property cost) at 9 per cent for 20 years, the EMI will work out to ₹76477.

Further, you would need to have ₹15 lakh for down-payment and other registration charges.

You would you have to save up by being extremely prudent in the early years of your career.

The EMI in the above case works out to more than 60 per cent of your monthly salary, whereas financial planners recommend 30-40 per cent as the ideal allocation for all loan commitments put together.

If you service any other personal or education loan, your surplus further diminishes significantly.

Thus, you will have to run a tight ship with respect to your finances in the initial stages of your career, with very little leeway for indulgences.

Renting and investing

Instead of loading yourself with EMIs, you could consider living on rent. Consider our case mentioned earlier.

You could get a house on rent for ₹25,000. Or, if the area near your office is expensive on the rent front, you could opt for a property available for a rent of ₹50,000 by sharing it with another person – paying ₹25,000 each.

Compared to an EMI in excess of ₹76,000, your outgo would only be ₹25000.

Now, if ₹50,000 is deployed in even conservative avenues such as balanced advantage funds over a period of 10 years, and the returns are 10 per cent a year, you would have ₹1 crore at the end of 10 years.

Besides, over the 10-year period, your salary would have grown substantially, thus increasing your loan eligibility amount.

Sure, there is chance that property prices would have risen, too, over the period.

But then, you would be in a position to buy a house worth even ₹3 crore at that time!

Non-financial factors

Apart from money and investing angles that we discussed earlier, there are other non-financial factors that would necessitate delaying your house purchase decision to your mid-30s – about 10-12 years into your career.

First, in the initial stages of your working life, you may move jobs periodically or even frequently. You could be experimenting with your career to decide what suits you best. In such a situation, you could be moving across cities or even go abroad for employment. So, locking yourself with a property investment and EMI commitments drag you back from moving around freely. Besides, maintaining the property from another city or ensuring that the tenant takes good care of your house is a challenge.

Second, when you marry and have kids or if you plan to have your parents with you, the space requirements of an apartment would rise substantially. You would end up looking for a larger apartment, while probably having to sell your old property to afford the new one.

Third, you cannot take sabbaticals or higher education breaks easily, as paying the EMI without a salary would be challenging.

When should you buy?

From a financial standpoint, you must have at least 40-50 per cent of the property price as financial investments with you, so that your outgo in loan servicing is kept low.

This would happen only in the middle stages of your career – at 35-40 years of age.

If you have a working spouse, your joint income would be large and EMIs would not be more than 25 per cent of the household income.

By 35-40, you would have figured out your career path and settled in your workplace. Also, there is good chance that you would have decided the best city to settle down for the rest of your life.