I am 29 years old, am single and living with my parents. I plan to buy an under-construction flat in a nearby city. I would be paying 33% of my net income as equated monthly instalment (EMI) for the same. I am already paying 20% of my net income as EMI for an under-construction flat in my current city. As per State Bank of India home loan rules, I am allowed to take EMI of 55% of net income. Hence, I am thinking of taking the plunge. I am liquidating all of my fixed deposits for this purpose so that I will have the required 15% downpayment for the new purchase. Rest of the cost will be financed through the home loan. I have a term insurance which insures me for five times my annual salary. I also have an emergency fund which is enough for three EMIs for both the flats. Also I have savings of Rs 3 lakh in mutual funds. In the near future, there would be some expenditure on my marriage, too. I would be able to save some money for the same till the EMI of my second home loan starts. I am expecting that my salary will not decrease from the current level. Are my financial moves sound?
You are going ahead and investing more than half of your net income in one asset class.
And this will also make you break all your fixed deposits as you have to pay for the downpayment. I am assuming that the EMIs are for a period of 15 years. This is actually a case of putting all your eggs in one basket.
We have also been seeing a trend where whenever any investor accumulates a corpus he wants to add on to his kitty of real estate, irrespective of the number of property he already holds or will inherit. This, typically, leads to a disproportionate increase in one asset class versus other asset classes. In a country like ours, there is a fetish for an asset class like real estate. There are advantages and disadvantages associated with all asset classes and, therefore, the need of diversification in various asset classes is then ignored.
This does not mean that real estate is not a good asset class. But you need to ask yourself some tough questions. What happens in case you need money urgently since real estate is not a liquid asset class. Will you be able to save enough for your marriage by the time your EMI starts or will you need to dip into your mutual fund corpus? Also, three months of buffer may not be enough for you.
You have not mentioned whether your parents are dependant on you or not. If they are, then your insurance cover may not suffice. You need to provide for the entire amount of the home loan through a term cover over and above what you need to provide for your parents.
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