Last Updated on September 13, 2023 at 7:59 am
A reader says, “I am 32, and my wife is 29. We are employed in the same PSU and can take home loans with a combined loan limit of up to INR 1 Cr at a special staff interest rate. We are also eligible to avail company leased accommodation during the course of employment”.
“Is availing a home loan and building a house right now better, or constructing a house towards our retirement would be more beneficial for us? We have a land plot available and would need the loan solely to construct the house”.
Since this is a question that many readers ask, we requested SEBI registered fee-only advisor Akshay Nayak to list the general considerations before making a decision. Akshay holds an MBA in Finance from Great Eastern Management School, Bangalore. His website is akshaynayakria.com. His articles on personal finance and investing can be accessed here: akshaynayakria.com/blog.
At the outset, this is quite a complex question to answer. It cannot be answered through math and numbers alone. The reader’s emotions and aspirations may also be involved. They, therefore, become an important variable in the decision-making process. But this does not mean a decision can be made purely based on emotion. Several nuances must be considered before deciding whether to construct the house. The important ones among them have been discussed below.
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The convenience of Location: The reader has to keep the convenience of access to institutions such as schools, offices, hospitals and so on in mind. If the land available for construction is conveniently located to access the preferred institutions of the reader, opting to construct the house may make sense.
Possibility Of Frequent Relocations: If frequent relocation to other cities is a demand of the reader’s current job, he may be better served not constructing the house right away. Constructing the house but not occupying it may mean that the house has to be given out on rent. In that case, the reader must ensure constant availability of appropriately verified tenants, payment of potential maintenance costs and property taxes and water-tight creation of rental agreements. These are hassles that the reader may not want to deal with.
Rental yields in India currently range between 2% and 3.5% of the property’s value. This is lower than the return from a fixed deposit. Therefore, renting out the property is not worth the potential effort and reward involved. Therefore, The reader may construct the house right away only if he is confident of occupying it for a significant period.
Adequacy Of Down Payment: If the reader decides to avail of a loan for construction, the size of the down payment for the loan becomes a critical factor. The reader must ensure that he has adequate savings to pay at least 50% of the construction cost as a down payment. This would mean that the outstanding loan amount and EMIs thereon would be reasonable.
Investments For Other Financial Goals: EMIs come at an implied cost of hampering the reader’s ability to invest for his other financial goals, mainly retirement. Ideally, he must avail of a loan only if he has been investing for his other goals for at least 5-6 years. Also, the EMI payments must not exceed 30% of his monthly take-home income. This would improve the chances that the reader can comfortably continue his EMI payments and investments in parallel.
Construction for use as a retirement home: If the reader wishes to construct the house purely as a retirement home, he must first be confident of spending a significant portion of his retirement there. Also, he may wait until the final 5 to 10 years of his employment to initiate the construction. Doing this would allow him to assess things realistically. It would give him a better idea of how physically fit he will likely be post-retirement. The house can then be constructed to ensure accessibility in light of his physical condition.
Moving into his own house may clearly have emotional and aspirational rewards for the reader. But emotions need to be balanced with cognisance of the demands of building the house. So, it becomes a question that the reader has to answer from within after adequate introspection. If the reader can meet these demands, he may construct the house at his discretion. If not, he may be better served occupying the company-leased accommodation. He may construct the house later when he is better equipped to meet the demands of the process. This would allow the reader to make a financially prudent and emotionally fulfilling decision.
Editor’s note: Thanks, Akshay. In summary, we first recommend planning for financial goals and determining how much EMI one can afford without affecting investments for long term goals like retirement. If a good balance among expenses, EMI and investing can be found, and if you are sure you will use the house later in life, you can consider construction now. Otherwise, delaying construction and focusing on building net worth may be better. You can review the situation a few years from now.