A place of your own: How to decide about buying a home in a big city

More and more Indians are buying apartments rather than living on rent

A decade ago, tenants in key cities like Bengaluru, Mumbai, Pune, Chennai, Hyderabad, and Delhi-NCR would rent nine times before buying a home. Today, the younger generation purchases after renting only four to five times, according to NoBroker, a no-brokerage property site.
 

In Bengaluru, the median age of first-time home buyers has dropped from 42 to 34 in three years, with millennials and Generation Z increasingly opting for homeownership over renting.
 

Home shift

One reason for this trend is rising rentals. “With rent surging by over 30 per cent in many major cities over the past couple of years, buyers are increasingly motivated to purchase homes,” says Amit Agarwal, chief executive officer (CEO), Nobroker. 

A couple of decades ago, people usually bought a house or constructed one when they were in their 40s. But the age profile of the buyer has been falling. Many now purchase in their 30s, and some even in their 20s. “This shift is largely due to the increased availability of mortgages, which have become more accessible and cost-effective compared to a decade or two ago, allowing people to purchase a home earlier,” says Vivek Rathi, national director research, Knight Frank India.

Many people are averse to paying rent as it does not help them build an asset. “Many tenants now see rent as an expense and hence regard EMIs as a form of systematic investment plan (SIP) to build a non-volatile asset such as real estate,” says Santhosh Kumar, vice-chairman, ANAROCK Group.

Home loan interest rates today range between 8.75per cent and 9.5 per cent. If not inexpensive, they are not exorbitant either. “Home loans come with more attractive tax benefits than rental housing,” says Kumar.

With the number of double-income households increasing, disposable incomes have gone up. House purchase has become more affordable for such couples.

Before making a decision about buying or renting, weigh the pros and cons.

Lock in price

Financially, buyers get the benefit of locking in the price. “You will also benefit from price appreciation in this asset class. Historically, prices have increased in line with inflation, plus an additional one or two percentage points,” says Rathi. In due course, the house will become a valuable asset that can be passed on to the next generation.

“Owning a property also offers the potential to rent it out and earn rental income,” says Agarwal.

Psychologically, buying a property provides stability, and (for many) a sense of having achieved one of life’s major financial goals. Settling in a locality for the long term also allows one to foster deeper social connections.

“With homeownership comes the freedom to personalise and renovate your space without the landlord imposing restrictions,” says Agarwal.

Buying a home requires taking a loan, a significant financial burden. Especially for younger couples with limited resources, it means they may not be able to invest adequately in their early years in assets like equity mutual funds and benefit from the power of compounding.

Real estate is not a liquid asset. “Selling your home and accessing its value can take some time,” says Agarwal.

Purchasing a house also reduces mobility. To capitalise on job opportunities, youngsters need to move to the city or the country where the best opportunities are available. This becomes difficult when they have tied themselves down to a house.

Buy now?

Experts say you should be certain of living in that city and locality for a long time if you decide to purchase a house.

Buying a house gives emotional satisfaction to many, which is hard to quantify. On the financial side, however, there are a few metrics one can use to judge whether market conditions are favourable.

“Generally, it makes more sense to buy when the gap between the cost of buying and renting is narrow,” says Rathi.

The cost of renting, according to him, can be represented by the rental yield, currently around 3 per cent, while the cost of buying is reflected in the mortgage rate, currently about 9 per cent. The current gap of 6 percentage points is on the higher side, making renting the better option, according to Rathi.

The argument for buying right away is equally compelling. According to ANAROCK Research, average property price in the first half (H1) of 2024 rose 25 per cent year-on-year in top seven cities. It rose from Rs 6,470 per sq. ft. in H1 2023-end to nearly Rs 8,070 per sq. ft. by H1 2024-end.

“Given that prices continue to see an upward trend across cities, now is a good time to buy if one is looking to buy a property for self-use,” says Kumar. His logic is that with trends indicating prices may continue to grow, the cost of acquisition will only grow for those who choose to wait.

The bottom line is that even if this is not the most optimal time to buy, you should go ahead and strike a deal if you need a house. Besides, if you are going to hold it for decades, the timing of purchase will appear inconsequential over such a long horizon.  

Financial wherewithal

Once you have made the decision to buy, ensure that you have the financial resources to take on this huge commitment.

EMI to take-home salary: Banks typically lend 4-4.5 times your annual take-home pay. “Total EMIs, including other debts, should not exceed 40 to 50 per cent of your income,” says Adhil Shetty, chief executive officer (CEO), Bankbazaar.com. For example, with a monthly income of Rs 1 lakh, you might qualify for a Rs 50 lakh loan. A 20-year loan at 9 per cent would have an EMI of about Rs 45,000. Consider a longer tenure or a co-applicant to manage EMIs.

Ideal down payment: Banks usually require a 10 to 20 per cent down payment. “For a Rs 1 crore home, manage at least Rs 20 lakh as down payment. The rest can be financed,” says Jinal Mehta, founder of Beyond Learning Finance.

One should ideally aim to fund at least 30 per cent of the home’s price, including additional costs like brokerage and stamp duty out of their own pocket. “This 30 per cent should be available in liquid assets such as bank fixed deposits, cash, or liquid funds,” says Kavitha Menon, a Sebi-registered investment adviser.

Credit score: A credit score of 620 is the minimum for most loans. Scores of 700 or higher are good and help get better rates. Aim for 740 or above for the best rates. Check your credit report for errors and improve your score before applying.

Consider all costs beyond the purchase price, such as taxes, interiors, and maintenance. Avoid overestimating future income or taking on a large loan that strains your budget. Maintain emergency savings, plan for prepayments, and get a pre-approved loan before house hunting. “Pre-approval helps set your budget and reduces stress, preventing loss of earnest money due to loan delays,” says Menon.

Finally, have an emergency fund of at least 12 months to take care of eventualities like job loss, illnesses or rate hike. 

Precautions homebuyers must exercise

 

Factor in all costs beyond the purchase price, including registration and stamp duty, cost of doing up the interiors, etc.
 

Avoid overestimating future income growth
 

Obtain a pre-approved loan
 

Pre-approval helps set a budget and prevents loss of earnest money due to loan delays
 

Plan for prepayments to reduce total interest cost  
 

Maintain emergency fund covering 12 months of expenses to handle job loss, illness, etc.