A guide for millennials on importance of planning funds for home ownership

Updated: May 15, 2021 12:06 PM

Building a financial asset, such as a home, provides substantial security against future uncertainties and can also provide a second income in the form of rent.

With work from home also becoming an almost permanent setting, buying a first home or a bigger one has become a practical option for most millennials

The Covid-19 pandemic has taught us that uncertainties of any magnitude can set us back on our personal, professional and financial goals. No matter how prudently we plan our lives, a crisis has the ability to overturn even the best laid plans. Besides the rising concerns around affordable medical insurance and healthcare, maintaining financial stability has been among the top priorities for most people. Millennials, for that matter, have experienced a crisis as transformative as the pandemic pretty early on in their lives.

For those who have lost their jobs and some who haven’t been able to reach their financial goals this year, the pandemic has been a wake-up call. It has forced them to plan their savings and investments better, for a more secured future. Millennials and young professionals are now thinking about building their financial assets much earlier in their life, to keep up with a uncertain world.

With work from home also becoming an almost permanent setting, buying a first home or a bigger one has become a practical option for most millennials. However, buying a home is a cumbersome process. It requires a fair bit of thought, financial discipline and commitment. Hence, it is advisable to start planning and accumulating funds early on to become a home owner at a young age.

There are a number of compelling reasons to buy your dream home in your late 20s and early 30s:

The real estate industry has used this crisis to come back stronger, with many more offers and schemes for first time home buyers. There are more options for smaller sized and affordable homes now than ever before.

Most financial institutions and lenders are offering home loans at very competitive interest rates – that are at a multidecadal low. These coupled with some great products that allow for more flexibility in repaying the loan and one’s own contribution, are making home buying a less tedious and more affordable process. Recent stamp duty deductions and tax benefits are more reasons that make purchasing a home more attractive in recent times.

Rentals are generally charged at 2-3% of the property value while home loan rates are at about 7%. Until 2-3 years ago, this gap used to be over 6%. In pure mathematical terms, even now, renting an apartment is better than buying if the property appreciates less than 5% per year on an average. However, if laying down roots is a priority and the resale value of the apartment is not the most important criterion, this is the best time to buy in over two decades. The tapering off of property prices, rising incomes (slowly and gradually) and the lowest interest rates India has ever seen, make it a great time to buy.

Some financial lenders offer a maximum tenure of 25 years while others go up to 30 years. The longer the tenure, the lower the monthly instalment cycle. If you’re a 25 or a 30 year-old borrower, you might want to consider a longer tenure loan that allows for lower EMIs and makes your purchase more affordable. The total cost of ownership goes up with increasing the tenure of the loan, but this Is a trade-off that requires mindful consideration.

For those looking to buy a house with the intention to live in it for a substantial period, it would be good to check if there is an option to start repayment with lower EMIs and gradually increase the amount over the tenure of the loan. This allows you to buy a house large enough for tomorrow’s needs while keeping current affordability In mind.

In case of a bank offered subvention scheme, the total home cost goes up in exchange of getting relief from not paying EMIs until possession. While no EMIs help with initial affordability, do you want to repay a higher amount in the long run? Finding the right balance between overall cost of ownership and monthly outflows is critical.

Building a financial asset, such as a home, provides substantial security against future uncertainties and can also provide a second income in the form of rent. It not only paves the way for long term financial prudence but also enables young people to spend their money more meaningfully. Therefore, taking stock of one’s savings and investment plans, reading more about increasing one’s credit worthiness and being more focused towards being financial independent is a step in the right direction for millennials.

(By Manish Shah, MD & CEO, Godrej Housing Finance)

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