Is this a good time to buy a home?

If the house is for self-occupation, the right time to buy a house is now. However, if the house is for investment purpose then there are other factors to consider.

The right time to buy a house for an individual is unlikely to be a straight answer. It varies substantially depending on the life stage of an individual. Of all the factors governing the decision to buy a house, the 'real need' is the foremost and must supersede emotion or aspiration. The outlay for a real estate asset or house is amongst the largest. The decision to buy a house should be an integral part of the financial plan where all other financial goals are provisioned in quantum as well as time space. Hence, the decision to buy a house should never be a haphazard one so as to cause financial constraints for other financial goals.

If the house is for self-occupation, the right time to buy a house is now. The individual should not wait for a major correction in prices, though the right time and price for a real estate investment is of essence. The other factors to be considered are: the right cost of finance, location, ownership and legal scrutiny, transaction transparency and hygiene, the tax advantages of owning a house over a rented one, etc.

The writer is working with Financial Planning Standards Board India (FPSB India) in the capacity of Vice Chairman and Chief Executive Officer. The views expressed here are personal, and do not necessarily represent that of the organization. FPSB India is the sole marks licensing authority for the CFP marks in India, through agreement with US-based FPSB Ltd.

We can scrutinise the 'life stage approach' to arrive at the right time to buy a house which in turn considers some basic conditions to be satisfied which are:

• Savings to the tune of at least 25 per cent are ideal towards margin money or down payment
• Income level so that all loan repayments (including housing loan EMI) are within one-third of the net income. This should be adopted throughout.

These conditions are generally met in the life stage between 30 to 40 years. At this stage, an individual is likely to have a stable career, growing income and enough savings to meet the above conditions.

A family and kids in this stage make a clear vision for other financial goals as well. Besides, the individual has around 20 years to repay the housing loan. If the conditions of a stable, robust income and financial savings are met in a life stage earlier than 30 to 40, that is, between 25 and 30 years, the individual is well advised to buy a house.

Care has to be taken that heavy financial obligation due to the home loan should not constrain an individual for other financial goals such as marriage and starting a family.

The only drawback is that the life goals are not fully envisioned at this stage. Also, heavy debt burden in this stage may hold back the risk capacity of the individual to hunt for some bright opportunities such as career development and investment options.

In contrast, there is less anxiety in meeting the housing goal at the latter stage, that is, after 40 years. There is enough financial stability and asset base at this stage to stake a housing loan for a larger house as per more visible needs of the family. An individual is likely to have a sound asset base and net worth at this stage to withstand any downside in terms of financial liability due to house. There is still enough working life span of 15 to 20 years to repay the housing loan.

However, if the house is for investment purpose, it is advisable that one should seek suitable loan to finance a second house. The complete interest paid on such loan availed is available for set off against salary income under Section 24 of the Income Tax Act, 1961 as against Rs 150,000 limit in case of self-occupied house.

Careful consideration with respect to other debt outstanding should be evaluated. It is recommended that the previous loan (if any, in case of self-occupied house) should have been paid at least to the extent of 60 to 75 per cent.

One should extinguish all loan liabilities including the housing loan well before retirement age, say at the latest by 57 years of age.

In this context taking a loan to buy a house when one nears 50 years is not recommended. However, one can well consider a separate retirement abode with a moderate financing option apart from a self-occupied property, which can be rented after retirement to generate steady income stream as well.

One other consideration than the life stage criterion to buy your own house is the 'goals priority'. Though buying a house on loan in fifties or near retirement is not advised, doing so at a fairly early life stage by constraining other important goals such as children's education is also not recommended. In goals priority therefore a house finds a place somewhere 5 to 10 years before the higher education and marriage of children.

As discussed before, the goal of buying a house should be a careful one considering other important financial goals of an individual. The professionals, especially Certified Financial Planner or CFP practitioners are well-trained in preparing and executing financial plans. They prioritise the financial goals of a client after analysing the current and future finances, the affordable debt in a given situation and debt servicing relative to income level.

The right time to buy a house, in a nutshell, depends on the financial stability of an individual after taking into account other goal constraints and relative advantages of owning a house over the alternatives.