In last week’s edition, we talked about the two modes of financing your dream home. Today, we will discuss the aspects of buying a house too early in your career. Is taking such a step a huge financial mistake?
Let’s have a look at some factors that can help you decide the same:
The Negative SIPs
If you decide to purchase a house early in your career, you might finance it by taking a huge home loan. And with this begins the vicious cycle of paying monthly EMIs. These are termed negative SIPs.
Instead of investing through SIPs in stocks and mutual funds, you get trapped in repaying your loans. Also, paying EMIs becomes a fixed obligation, leaving less scope for savings and investments. So this negative process starts early in your life. But if you have enough savings to purchase the house upfront, then it is relatively okay.
Delayed Financial Independence
Financial independence is a stage where your passive income earned through dividends and interest can cover all your monthly expenses by leaving a margin of safety. It also means that you are free to do whatever you want, not what you must do!
This can be considered a second-order effect of purchasing a home by taking a home loan. Paying regular EMIs means fewer amounts in investments through SIP mode, which means a lower level of wealth accumulation and delayed financial independence.
An Irreversible Decision
Purchasing a house too early in one’s career can be a massive mistake because the decision, once taken, cannot be reversed. A home is not a company’s equity share that one can sell through a stock exchange. It is way more illiquid.
Also, buying a house can make you asset rich but cash poor, meaning that you have a significant asset but cannot monetise it because of illiquidity.
Tax Benefits and Rent Savings
A plus point is that if you take a home loan to purchase a property, it is eligible for tax benefits under Section 80C. Also, when you invest in an under-construction home, you are eligible for a pre-construction interest rebate and can claim a deduction on the interest paid on the home loan.
Also, when you purchase a house, you will not live in a rented space, which would have been the only other alternative. So you will also save a fixed monthly sum equal to the rent amount!
Capital Appreciation
On a positive note, purchasing a house early in your career can be advantageous because it will leave you with an appreciating asset for your lifetime. As can be observed through historical data, assets such as a house provide capital appreciation benefits and act as an inflation hedge, i.e., real estate prices appreciate in sync with inflation, thereby maintaining purchasing power in the long run.
Also, if you have nothing to look upon, you can always consider selling your house to pay your dues.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
