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Are you buying a house just because home loan rates are lower?

financial planning - saving to buy house - budget house

I got one call from a person asking, whether he should buy his second home as home loan rates are lower.

When the whole world is struggling financially due to pandemic, thankfully, this person has been doing well financially.

Well, if we think on one side, he is right. If he has money and if loan rates are lower, he should take advantage of it.

But we should always look at other side of the coin!

Real estate has always been an attractive asset class to invest in. Many people buy and add on real estate in their portfolio, just to show off or as a matter of prestige or in expectation of higher returns.

Well, COVID-19 has changed many equations and dimensions of the ways people perceive their personal finance. Still, majority of banks and housing finance companies are seeing huge demand for loan takers due to reduction in home loan rates. Government on the other hand has also reduced stamp duty rates etc to make home buying attractive.

If you are a first-time home buyer, please give a due consideration and for buyers who want to add one more real estate to your kitty, please pause and think.

Here are some points to consider before purchasing your house with some learnings from this pandemic!

Consider your cash flows:

If you are into business/profession or service, where your income flows were stable in pandemic, then you lucky.

But still consider your cash flows for future, consider your job security, viability of your business activities and try to strengthen it.

‘Cash is the king’ which we learnt from this pandemic. So, ensure that you have cash generating income and investments with you. So, loans and liabilities will not bother you much. One we apply for a loan, we can get it based on our ‘eligibility’ but ‘affordability’ for that loan for a long term is what we need to consider based on our cash flows.

Consider future of work mode:

If you are doing a job, then many employers have already turned ‘work from home’ mode on for their employees. This will continue for next 1-2 years in many fields. In many cases, people who were living on rent have left for their hometown to be with their family, whereas many people are considering to buy their dream home now.

So, please decide on your course of action considering your future work mode.

Do you have your emergency fund ready?

Emergencies never come with prior intimations. COVID-19 has given us biggest example of such contingencies. So, we should learn from it and make our emergency fund ready first.

This fund should be equivalent to 12 months of your household expenses. So, you will be well equipped to run our household expenses, pay your home loan EMIs, contribute to your children expenses etc if you face any contingency in future.

12 months are sufficient for you to get back on your feet. So, make it a priority before applying for a home loan.

What about your life insurance and health insurance?

Insurance are strong pillars of your personal finance. Its important to safeguard financial independence of your dependents when you take any loan or liability.

For this, please have your own personal ‘term insurance’ in place. This is the kind of insurance which serves true purpose of taking life insurance policy. Here, if insured person survives the term then, he/she gets nothing in return but if unfortunately, he/she doesn’t, then nominee of the policy gets the sum assured.

Health insurance is another important factor. Health is wealth but when unfortunately, we fall ill, then medical expenses can erode our wealth. To reduce burden of such costs which are sky rocketing these days, health insurance policy is a must.

Even though your employer is providing you with group Mediclaim, you should have you own insurance policy.

You may not be with the same company in future, but your own health insurance will be with you irrespective of your job and employer.

So, before applying for home loan, please make sure you have these two with you.

Have a check on your current portfolio:

For second home buyers, along with considering above, please give a check to your current assets and investments. You should have more liquid investments with you. Accumulating too much of real estate is not good as it increases costs of maintenance, demands your personal attention if you decide to rent it out, also have reselling price pressure in future.

For first time home buyers, you will add your dream asset in your portfolio when you will buy your own house, but for other goals, please consider starting investments.

Decide how you will you maintain this real estate:

When you are done with above checks, then go for purchasing. If you are going to use it for you, it will make you decide in better way about location, price range, amenities etc.

This will keep you slightly away from the hassle of managing costs, tenants, keeping a tab on reselling rates in your locality which generally happens when it is your second property.

So, Second home buyers, please rethink. If you have surplus to invest, please invest in some liquid investments like mutual funds, stocks, FDs, Bonds, gold etc. based on your goals, risk appetite and investment tenure and if you are done with all these, then purchase considering the above. Make sure you have defined use for that second property.

Buying a home is everyone’s dream, but we should be vigilant before taking decision.

When you are equipped with the above, you should definitely go for it. For people who want to add one more real estate in their asset kitty, please rethink considering above factors.

Happy home buying!

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