Financial planning: The money question

Nitin and Asha have moved to Delhi from Bangalore after Nitin got a promotion. They have a 20-year-old daughter who plans to study business management. The couple owns a house in Bangalore, which was bought with a housing loan. They still have eight more years to repay that loan. Nitin and Asha think it would be a good idea to buy a house in Delhi. Instead of paying rent they could pay the EMI and build another solid asset. What would be the financial implications of this strategy?

Buying a house is a big-ticket investment and usually requires a large loan. Assuming that the couple will take a loan, servicing two large EMIs requires a higher level of income and savings. If they do not have a big disposable income, they would end up using costly personal loans and credit card rollovers to meet their short-term needs.

The two EMIs will restrict their investments in other assets and make their portfolio lop-sided and inflexible, with two houses, both large but illiquid. This could also prevent them from achieving other crucial financial goals. Raising money for their daughter’s education and marriage would become quite tough.

While the thought of building an asset instead of paying the rent is alluring, the two are not comparable. Rental values have not risen as fast as property prices have in the past few years. In a city like Delhi, monthly rent is seldom more than 1-2% of the value of a property.

On the other hand, the interest rate on home loans can be as high as 11%. The household will stretch its finances to build an asset which is tough to sell or earn income from. The appreciation in its value may be of little actual use to the family. It might be wiser for them to live on rent in the new city or sell the property in Bangalore to buy a new one in Delhi.


All content on this page is courtesy Centre for Investment Education and Learning (CIEL)