Why Buying a Home Early in Your Career Could Harm Your Financial Well-Being

Perhaps the largest expense for most of us is the purchase of a home – most often an apartment.

And since Covid, there has been a trend among many working young people to buy their own “spacious” homes early in their careers.

Recent studies by property research firms and mortgage providers show that the average age of mortgage customers has fallen from 40-45 years old a decade ago to the early 30s, and often into the mid-to-late 20s.

From a traditional social perspective, we are often asked to “settle down” quickly, and one indicator of this is having a home.

But from a financial health standpoint, is it a good idea to buy a home on credit within a few years of starting work?

From a financial and even a practical standpoint, buying a home in the early years of your career may not be a smart decision.

EMIs create cash crunch

As returning to the office becomes the norm, most of us would like to buy a home as close to the office as possible to cut down on travel time.

But the catch here is that apartments that are, say, 30 minutes or less from your workplace are likely to cost more.

Even modest-sized apartments located relatively closer to office space and IT parks in India’s top 10 cities are likely to cost a lot – typically not more than Rs 1 crore.

Let’s assume that you somehow landed on a property – new or used – that costs Rs 1 crore (including all taxes and registration fees) and is ready to move into. The delay in delivery of the project by the builders is another problem that we ignore in our discussion.

Banks are now offering 80-90 percent of the property value as loan, which in this case is Rs 80-90 lakh.

To be eligible for the loan amount in the above range, your net monthly salary must be at least Rs 1.2 lakh to Rs 1.25 lakh.

Let’s further assume that you are already successful in your career and have earned that kind of money.

If you avail a loan of ₹ 85 lakh (85 per cent of the property value) at 9 per cent interest for 20 years, the EMI will be ₹ 76,477.

Additionally, you will need Rs 15 lakh for the down payment and other registration fees.

You will have to save with extreme caution in the early years of your career.

The EMI in the above case is more than 60 percent of your monthly salary, while financial planners recommend 30-40 percent as the ideal allocation for all loan obligations put together.

If you are servicing any other personal or educational loan, your surplus will decrease significantly.

Thus, in the initial stages of your career, you will have to strictly monitor your finances, with virtually no indulgences.

Renting and investing

Instead of burdening yourself with EMIs, you might want to consider living off your rent. Consider our case mentioned earlier.

You can rent a house for £25,000. Or, if the space next to your office is expensive in terms of rent, you can choose a property that can rent for £50,000, sharing it with another person, paying £25,000 each.

Compared to an EMI of over Rs 76,000, your output will be just Rs 25,000.

Now, if ₹50,000 is invested even in conservative avenues like balanced benefit funds for 10 years and the return is 10 percent per annum, you will have ₹1 crore at the end of 10 years.

Additionally, over a 10-year period, your salary would have increased substantially, increasing the amount of your loan eligibility.

Of course, there is a possibility that real estate prices will also increase during this period.

But then you can buy a house worth even ₹3 crore at that time!

Non-financial factors

Beyond the money and investing aspects we discussed earlier, there are other non-financial factors that may cause you to delay making the decision to buy a home until your 30s—roughly 10 to 12 years into your career.

First, in the early stages of your working life, you may change jobs periodically or even frequently. You can experiment with your career to see what suits you best. In such a situation, you can move around cities or even go abroad for work. Thus, locking yourself into real estate investments and EMI obligations robs you of freedom of movement. It’s also difficult to maintain an out-of-town property or make sure your home is well taken care of by the tenant.

Secondly, when you get married and have children or plan to have your parents with you, the requirements for apartment space will increase significantly. You’ll end up looking for a bigger apartment, but you may have to sell your old property to buy a new one.

Thirdly, you cannot easily take sabbaticals or breaks from higher education as paying EMIs without salary will be difficult.

When should you buy?

From a financial perspective, you should have at least 40 to 50 percent of the property’s value as financial investments to keep your loan servicing costs low.

This will happen only at the middle stage of your career – at 35-40 years old.

If you have a working spouse, your total income will be higher and the EMI will not exceed 25 percent of the family income.

By the age of 35-40, you would have decided on your career path and settled into your workplace. Plus, there’s a good chance you’d choose a better city to live in for the rest of your life.