Most of us don’t have the luxury to purchase a house without a home loan. So, if you plan to purchase a house, you have to take a home loan at some point during your working years. A question that may cross your mind, “What is the ideal age to take a home loan?” Should you take a home loan at the start of your career? Or should you wait and take a home loan towards the latter part of your career?
There is no fixed answer. The answer depends on how you think, the comfort that home ownership gives you, your financial position, cash flows, affordability and many other aspects. In this post, let’s look at such finer points.
Do note that I would not delve in ‘Buy Vs. Rent’ argument in this post. When you can stay in a house that costs about Rs 1 crore by paying rent of about Rs 15,000- Rs 20,000 per month, the case for renting becomes quite strong. The rental yields across the country are in the range of 2-3% per annum. Even a bank fixed deposit will earn you a higher rate of interest. Those in favour of ‘Buy’ will argue that we need to look beyond rental yields since real estate also offers potential for capital appreciation. However, when you are planning to purchase a house to stay in (and not as an investment), the capital appreciation argument does really tilt the scale in favour of ‘Buy’. And it does not end here. I have seen quite complex spreadsheet analyses on ‘Buy Vs. Rent’. However, I believe numbers are not everything. In my opinion, everybody should plan to own a house at a place you would want to stay after retirement. There are matters that can’t be analysed using an excel sheet. House ownership gives financial and emotional satisfaction and security which is difficult to model on an excel sheet. Not to ignore the comfort of complying with the social norms. A house can also act as a buffer if you suffer financial setbacks during retirement.
Coming back to the main topic, this post assumes that you plan to purchase a house to stay in and that too using a home loan. With this premise, what is a good age to take a home loan?
If You Take a Home Loan Too Early (Mid or Late 20s)
What Are the Pros?
- At this age, there may be a tendency to overspend on discretionary activities (or anything that would seem a waste of money in hindsight). Monthly EMI payments may rein in such tendencies.
- If you take a loan at an early age, you can get a longer tenure loan. A longer tenure means a lower EMI and greater affordability.
- If you can close the home loan early, you have great flexibility with investments during the latter part of your professional life.
- You may be in a better position to take risk with an under-construction property, which may be cheaper than a constructed property.
- You may be eligible for special loan products such as SBI FlexiPay loan scheme (a step up home loan product).
- You have lesser responsibility and greater flexibility.
What Are the Cons?
- Since the EMI payments are likely to form a good portion of your monthly income, the home loan EMI payments may crowd out your investments for other goals. It is not uncommon to see people in their late 30s or early 40s with their entire net worth in their house. Essentially, the investments for all the other goals may get compromised.
- Moreover, when you are young, you may not be sure where you would settle as your career progresses. Many life events such as marriage may change where you would want to settle. Your career choices can also take you to a different place.
- Since the loan eligibility is lower, you may settle for a house where you don’t really want to stay but merely look at it as an investment.
- Managing the down payment for the house can be problem.
If You Take the Home Loan in Mid 40s or Early 50s
What Are the Pros?
- You are likely to have a greater clarity about where you want to settle and the kind of house you want.
- Managing down-payment may not be as big a problem.
- At that age, EMI payments may not compromise investments for other goals. In fact, you may have already accumulated enough for some of your prominent goals.
What Are the Cons?
- The loan tenures may be shorter and hence the EMI burden may be higher. If the growth in income has not kept pace, your loan eligibility can suffer.
- If you have not planned your investments well in the earlier years, a heavy EMI burden can get you into some serious financial mess. At this stage in career, the margin for error is low. Therefore, if you want to purchase a house late, you must plan well in your earlier years.
- Getting into an under-construction property gets even riskier at this stage. You don’t want to be stuck with an incomplete property when you are staring at retirement.
What Is the Ideal Age to Take a Home Loan?
There is no right or wrong answer. As you can see, many of the situations or aspects considered are subjective and the same point is mentioned in both pros and cons. You need to take a call on the basis of your cashflows, the value you and your family attaches to home ownership, clarity about life goals etc.
The key is that:
- You must plan to purchase a house before retirement at a place where you would want to stay after retirement. This means even if you don’t have a plan to purchase a house right now, you can start working towards it. For instance, you may be 25 but want to purchase the house after 15-20 years. Start saving for the purchase of a house. In this example, since the goal is many years away, you can consider investing in equity funds for house purchase.
- Do not let your home loan payments compromise investments for other goals.
- Make sure you repay the home loan before retiring.The good part is that the banks will ensure this.
In my personal opinion, mid to late 30s should be a good time to take a home loan. Not too early that it compromises your other investments. Not too late that there is little scope for course correction. However, as I mentioned above, there is no fixed answer that applies to everyone.