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“Settle” early in life – buy a home when young

This article tells you why buying a house early in your life is a very good idea.

You know how to set your goals, and invest in a disciplined manner based on these goals. (To know more about this, please read “Goal Based Investing“)

But do you know what the most common goal is for people? It is buying a home! And understandably so – it costs Lakhs of Rupees, and is usually the single biggest purchase in our lives.

There was a time when people lived in rented houses or company provided quarters for most of their lives, and started thinking about buying an apartment only when they turned 45 or 50. But the trend is changing, and more and more people are buying their houses in their 20s or 30s.

And this is a very healthy trend – buying a home of your own early on in life makes tremendous sense.

 

Building an Asset

The most important thing is that when you buy a house, you are buying an asset. And it is an appreciating asset.

When you are young and have some surplus, you might be tempted to buy some other big ticket item, like a car, a fancy cell phone, an LCD TV or a laptop. But these are depreciating assets – which means that their value decreases every day. The moment you take these things out from the shop, their value goes down by 20-25%!!

Buying such big ticket items on loans is even worse – you acquire an asset whose value goes down every day, and you pay interest for this!

A house is different – it is an appreciating asset. Its value increases as days go by. In the short term, the price might fluctuate, but in the long run, the price of real estate always goes up. (Just like stocks – please read “Stocks – The winning bet for the long term” for more details)

And it is logical too – the supply (land) is finite, but the demand keeps growing as population goes up! And the demand in cities goes up even faster as more and more people migrate to cities.

Thus, a house is always a winning bet!

 

Major goal achieved early on

As I mentioned, buying a house is on top of the wish list for most people! Doing it early means you take care of a major goal aggressively.

 

Saving on Rent

You need to live somewhere – if you don’t buy a house, you would have to rent it. Which means that you would be paying rent every month.

And rent is sunk cost – you pay the amount, and it is gone. You do get to live in the rented house by virtue of the rent paid, but that’s it – you do not build any asset in return of the massive rent that you pay!

If you buy a house, you save on all the rent. You might pay a slightly higher amount every month as EMI, but you also build an appreciating asset of your own!

 

Inflation would be your friend!

A high EMI amount might seem like a big deterrent to you when you start considering a house. But you don’t need to worry about that either – this is one of the rare cases where inflation would be your friend!

Over the tenure of the loan, the EMI would remain more-or-less constant. It can vary if the loan has a floating rate of interest, but even that is a minor variation.

(To find out if you should go in for a fixed or a floating home loan, please read “To float or not to float, that is the question!“)

But with time, your income will increase. And it will increase by leaps and bounds for sure. A part of it would of course be because you advance in your career.

But a part of the increase would be to take care of inflation. As prices of goods and services go up, companies (and government too!) would increase the pay in the form of yearly increments. The DA component of the pay also goes up to take care of inflation.

Since a home loan has a very long tenure, over time, the proportion of the EMI amount as a percentage of your income would go down sharply, because the EMIs would remain the same, but your income would grow.

Thus, what looks intimidating today would hardly pinch after just a few years.

My own example

My dad bought a house through a home loan with 25 years tenure. The EMI was Rs. 565 per month – a princely sum when the loan was taken 3 decades back, but a laughable amount to pay for a house when the loan got over some years back!

 

High Disposable Income

When you are young, your living expenses are usually low. You don’t have to worry about paying college fees for your kids, or about your son’s wedding…

And if you are single, of course your expenses are much low compared to your income… (They should be, at least!!)

The bottom line – when you are young, your expenses are limited, and therefore, you have a higher disposable income than you would have in your middle age.

 

Compulsory Savings

You have high disposable income, but do you have high savings? Many people don’t :-)

When you take a home loan, you pay a monthly EMI. And you pay this every month, month after month…. This means that you are forced to save this amount every month – and this amount is used to build an appreciating asset for you!

 

Easy availability of Home Loans

Since there are so many advantages of buying a house early, what’s stopping the young people?

On problem is that when you are young, and are just starting out, you don’t have enough capital to buy a house. And that’s where the banks or housing finance companies come into the picture.

You only need to provide the margin money, which is around 15% of the cost of the house. Home loan companies are eager and willing to finance the rest! Take advantage of this, and take the plunge!

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