When should I get a home loan? How to decide this?

Published: November 23, 2021 at 7:45 am

Sudipta Roy asks, “I recently read the article – Why I gave up my life-long dream of buying a house. My dream is to buy a house too, and I don’t wish to give up on it. However, I do agree with the author’s view that all major financial decisions should be made holistically”.

“Thanks to your articles, I have seriously started planning and investing for my retirement. I am now confused about when to go for a home loan. Should I do it immediately or wait until I have built a reasonable amount of retirement corpus, for, e.g. five times my annual expenses. If I do it immediately, my investment schedule for retirement will be affected. If I wait, I am worried about the risk as my job is not certain”.

“Thanks again to your articles I now appreciate that real estate is just an asset class like equity or gold. So I don’t have FOMO (fear of missing out) if I delay the home loan. Just that I am confused about what to do. An article on this topic will be of great help to me and perhaps young earners in my position.”

This is a question that few would bother to ask as few appreciate the importance of retirement planning. Most people are emotional about real estate but not about their financial independence after retirement.

That said, just as there a is well thought out balance in the question, there should be balance in the answer too. Many specifics about Sudipta’s situation is missing in his email, but that is just as well since we could discuss a generic solution.


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Suppose we assume a person can, with his qualifications and/or work ethic, continuously strive to earn higher income every few years in the same organisation or different organisations. In that case, it may be better to service a home loan when young.

That is, use the first few years of employment to get rid of education loans; stabilise the family situation; cater to their immediate needs; build a robust emergency fund; begin investing for long-term goals like retirement; children’s future etc. and then start servicing a home loan either in the late ’20s or early ’30s.

Depending on a person’s salary and circumstances, building a retirement corpus that is equivalent to five times our annual expenses may take anywhere between 5-10 years.  Starting a home amortisation at that stage is not recommended because it would be too much pressure on the individual unless they have tenure (permanent jobs) and are passionate about it.

Yes, starting EMI payouts early in a career would result in lower investments. As long as it is reasonable, it should be fine. Let us consider this simple thumb rule for retirement planning.

Suppose your take-home pay is Rs. one lakh and Rs. 10,000 goes towards NPS contribution, and the same is also contributed by your employer. Your expenses* are Rs. 45,000. * Expenses here refer to only those expenses that will persist until retirement. So school fees, EMIs etc., should be excluded.

This means that you need to invest about Rs. 20,000 to Rs 25,000 from your take-home pay for retirement, making the total investment almost equal to the expenses.

Thus 45% of your take-home goes towards expenses, and 20-25% should go towards building a retirement corpus. If you start servicing a home loan for, say, Rs. 40,000 or 40% of your take-home, then you can invest about Rs. 10,000 to Rs. 15,000 for retirement other than mandatory deductions.

Thus the home loan would reduce your investments from 20-25% of the take-home to 10-15%. This is reasonable. Anything lower is not advisable.

Thus, if one can limit total monthly expenses to 40% of take-home pay; EMIs to another 40% and invest the rest, the time and money lost in loan servicing can be quickly regained with a higher investment (due to promotions and salary hikes) after about ten years. If the EMI will reduce your investment to below 10% of take-home, it is best to wait until your income is higher. Also read: How to buy a house with a home loan: Tips to maximise benefits and Why this Kolaveri to pre-pay home loans?!

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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