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How to decide if it is right to buy home now?

Three questions can help you in arriving at the right decision when it comes to your housing need.

June 24, 2016 / 05:45 PM IST

Amit TrivediA roof on the head – one of the greatest feelings of safety that humans have is to have a roof on the head, a house to live. If the house happens to be owned by one, it doubles the feeling of safety.With such feelings, one often wonders when one would be able to afford one’s own house. The way the home prices have moved up in last few years, housing has become unaffordable for the majority of youngsters, especially those who leave their hometown in search of a better tomorrow. These youngsters land up in large cities, where the real estate prices are much higher than they could imagine in their small towns or villages.However, after the beginning of liberalisation in the early nineties, home loans have become quite easy and convenient. Many youngsters take home loans to buy their own houses. They also have a choice of renting out one.What should they do? Should they buy a house or rent one? Should they wait to accumulate enough money to buy a house on their own or should they take a loan from a housing finance company or a bank? How much loan should they take? These questions bother many.However, when they seek answers to these questions, different experts give different perspectives. Very often, these experts give answers based on their own perspective rather than understanding the need of these youngsters.A tax-expert may advice them to go for a loan since there are tax benefits on the repayment of the same. A housing finance company may advice them to borrow suggesting that the houses would keep getting costlier over the years. A housing broker may want to sell one at the earliest. An investment advisor may offer the advice that one should rent a house and keep investing money to build a corpus for long term goals. Someone may indicate a view on house prices and someone may give a view on alternative investment options, while someone may offer a view on the interest rate movement.What should one do in such a confusing environment?There are three questions one has to face:• Buy or rent?• Cash or loan?• How much loan?First of all, one needs a house to live in. for that one can either buy one or rent one. Many of us often feel owning a house is a better idea since (1) nobody can ask you to vacate it, (2) it appreciates in value over the years, and (3) you leave something for your next generation.However, when the resources are not enough to buy the house, we need to take a home loan. The government makes the deal sweeter by offering certain tax benefits. When one takes a home loan, the principal repayment and the interest component, both are eligible for deduction from your taxable income. These tax benefits are offered to promote people to have their own house. We are often driven by such incentives.However, when we take a home loan, is it not equivalent of renting money from the bank for the purpose of buying a house? Let us clearly understand that in stead of renting the house, we have rented the money to buy the house. It is only at the end of the loan that you own the house. Till then, it is mortgaged with the bank. This is not necessarily bad, but one must understand this point.At the same time, by taking a home loan, one is buying an asset, which is likely to see price appreciation in future. Renting a house may be cheaper, but then you do not get the asset. Evaluate this point.Second and equally important point is that a loan is a commitment to return the borrowed money in future along with the interest on the loan. The repayment must come from the future earnings. One must be clear about this fact, though obvious. Any event having an adverse impact on one’s future earnings would also impact one’s ability to service these EMIs.The three questions we looked at earlier must be seen in light of these points.Check your ability to service the home loan EMIs while taking the loan. Many personal finance websites as well as those of various housing finance companies have calculators to find your eligibility for loan. Use those to check your eligibility. Over and above, please consider how you would manage (service the EMIs in) a stress situation.Many banks insist that you take a life insurance policy and assign it to the bank. Even if the bank or the housing finance company doesn’t insist on insurance, it is a good practice to take one. This would be over and above your normal requirement of insurance cover. Such an insurance cover must be term insurance as it is the cheapest form of insurance and it would protect your family’s financial situation in case something untoward were to happen to you.This, however, does not mean one should stay away from home loan. Out of the various types of loans available to individuals, home loan is one of the most preferred and advised. There are some good loans and some bad for individuals. Home loan definitely falls on the good side.Another important point is your attitude about loans, in general. Some of us are just uncomfortable with loans – this is a psychological matter and not related to numbers of finances. This could be due to the way you have grown up. In such a case, you may want to pay up the loan at the earliest. The home loan should allow you prepayment, whenever you want at the lowest possible penalty charges. On the other hand, some are very comfortable with loans. For them, the repayment clause should not matter as much as the rate of interest. Choose a loan with low interest rate. So go ahead and evaluate the alternatives before you sign the dotted line.The author runs Karmayog Knowledge Academy. Views expressed here are his personal views. He can be reached at amit@karmayog-knowledge.com.

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