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.

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?!

Do share if you found this useful

Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 700 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 2600 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 600 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps