Ravi N Rao, a software engineer from Hyderabad got married 5 years back to Swathi Rao, a banker. Ravi and Swathi are now 34 and 31 years old respectively. After two years of their marriage, they decided to buy a house. The house cost them 54 lakh and they took a joint home loan of 45 lakh to fund it. At that time, their combined salary was about 1.1 lakh ( 65,000 and 45,000 respectively).

Fast forward to now and the couple is expecting their first child in a few months. Swathi has decided to take a back seat in her career and will be a stay-at-home parent to take care of the child. But it’s not going to be an easy road ahead. As they transition from a double income no kids household to single income household with a child, they are worried about servicing the EMI, which is about 42,500.

“At the time of buying the house, we did not think   about such a situation. We exhausted all our savings for the down payment while buying the house," said Ravi. The couple is not an aberration; owning real estate is considered a proud purchase by many households which is normally funded through loans. House is one of the biggest investments you make, but it may not always be the best investment. You need to assess this asset class on the metric of affordability and future serviceability of any loan you take. Here are few factors that should help you decide if you are ready.

Unlike financial assets that are liquid—you can redeem your mutual fund units and realize the money in a few days—real estate is not liquid. It can take days to months to find a buyer and the ensuing hassle to sell off the property really makes it a sticky asset. Any financial plan starts with ensuring a solid emergency corpus that will take care of any unforeseen circumstances. “One should ensure that they have at least 6-9 months of emergency funding in liquid options," said Varun Girilal, co-founder and executive director, Mitraz Investment Advisors.

Then comes the short-term goals that you may have and think about how it may impact EMI payments. Say, having a new born may change priorities and that may impact income of the household. However, the home loan EMIs will continue to accrue; so have this discussion now rather than later. “The first thing one needs to do is to estimate the liquidity, contingency and funds for near-term goals," said Suresh Sadagopan, founder, Ladder7 Financial advisories, a financial planning firm. Make a list of your expenses—both monthly and annual. Also, note down the near term (up to 3-5 years) goals and funds you need for these goals. 

Whether you can afford the loan or not is a serious question you need to ponder upon. Your current financial position without touching your emergency corpus or disturbing your other financial goals—short- and long-term—should allow you to make a decent down payment. “One needs to see whether they have the 25% upfront amount. Ideally, the higher this amount the better," said Sadagopan. You will be more comfortable if you can afford to make the contribution of 40% to 50% of the property value as down payment. Then comes the EMIs. A good thumb rule is to ensure that your EMI should not take away more than 40% of your take home salary. You need to figure out how you will be able to service the loan in case of emergency like a job loss or increase in expenses. “A stretch of up to 50% of one’s post-tax monthly income in EMIs for the first 1-3 years is manageable provided one makes up in building liquid financial assets in later years," said Girilal. Besides taking the huge loan, the other mistake that Rao made was making pre-payment of home loan as and when the couple had some funds.

Then comes the ultimate question of whether you will actually use the house to live in. “This is important as people these days are mobile and they go to other locations nationally or internationally in pursuance of the career," said Sadagopan. If they are not certain, it may not make much sense buying a house—for they will have a home in one city and they may move to another and will have to rent out, added Sadagopan.

If you are not planning to live in the same city at least for another 5-7 years, it is better to stay on rent. “If you feel that there is a strong chance of relocating , then factor how you would be able to bear the rental cost in the new location and EMI servicing together," said Girilal. Selling the house and again buying another house in the new city would not be feasible as it involves lot of efforts; transaction cost—stamp duty, registration fee and brokerage—is also very high.

If you decide to let out the house, “you may not always be able to get a tenant immediately. Most housing complexes have high maintenance costs and one should factor that into monthly cash flow planning," said Girilal. It could also be very time consuming to maintain a house in another city. 

Buying a house can’t come at the cost of other important goals like your child’s education and your own retirement neither should it impact your lifestyle significantly. “Home loan EMI is one of the biggest breakers of passions such as travel, entrepreneurship and other interests. Buying a home should not mean having to work in a highly unsatisfying job or missing out on investing for your kids only because of the EMI pressure. It can also set off your time to retirement by a large number of years," said Girilal. So, besides servicing the home loan EMI, one should have enough savings to invest for other goals and expenses.

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