Buy a house now for these reasons

Given the current situation of high real estate prices and loan rates, does home buying have to be purely driven by emotions or is there an adequate financial logic for purchasing your own home? The good news is that even in this scenario, there exist five compelling reasons why you should buy your dream home.

1. Advantage from tax breaks and inflation

Tax breaks for home loans and inflation's impact on home loan repayments are two factors that continue to work as loyal servants for the home buyer. Under the present tax rules, you can get a tax break on interest repayments for home loans to the extent of Rs 150,000 and on principal payments up to Rs 100,000 per annum.

And, as inflation raises all other costs (and incomes), the real cost of your EMI becomes easier to bear. If you look at a loan of Rs 30 lakh (Rs 3 million) with a tenure of 15 years carrying a 9.50 per cent interest rate, the EMI works out to Rs 31,326, or roughly Rs 375,000 per annum.

After accounting for the income tax deductions thereon, the real cost to your cash flow for the first year would be only Rs 256,000.

Assuming that interest rates remain the same, by the end of your loan period, the 'real' cost of this EMI, after adjusting inflation and deducting tax, will be only Rs 72,428. This is probably the only time you will bless the bites that rising prices take out of money - it works to make your EMI cheaper each year.

2. Rising salaries

Meanwhile, salaries will continue to rise, both in nominal and real terms. According to a recent survey, the wages of mid-level IT professionals in India have risen by an annual average of 23 per cent in the last four years.

For other sectors too, be it new economy ones such as telecom or old economy ones such as FMCG, the salary growth rates have been in double digits. Thanks to these hikes, the average cost of a home has dipped from 11 times the home loan borrower's income in 1997 to 4.6 times now.

Estimates vary, but forecasts indicate that the salary growth is slated to remain in double digits for at least the next two to three years. With corporations increasingly including performance-linked pay in compensation packages besides wealth-creating pay components such as employee stock options, the effective impact of pay hikes will be much more.

3. Longer working lives

Your parents may have retired at 58 or 60, but you are unlikely to hang your boots so soon. Increased lifespans and better healthcare facilities will help you have a much longer professional life than your parents. This means that you will get a much longer period to repay the home loan. This is especially helpful if the tenure of your floating rate loan gets extended.

As the Indian economy grows, an acute talent shortage - signs of which are already beginning to surface - will make it financially tempting for skilled individuals to move on to a second, third and, perhaps, even a fourth career.

This is something that is already happening in the West, especially in the US, where people are increasingly looking at working till age 70. Thus, even if someone is taking a loan at 31 today, it is unlikely to stretch him financially since he will be 51 at the end of a 20-year tenure.

4. Appreciation of property values

As an investment, homes will continue to be as rewarding as in the past. Even if housing prices tumble over the next few years, they will more than recover - this has been their history in modern India.

Urbanisation is bound to accompany our economic progress - 30 per cent Indians will be living in cities by 2010, a figure that will go up to 40 per cent by 2020. Experts expect this to create a long-term housing shortage.

In the next 10-15 years, it is estimated that 85 million housing units will have to built to meet the demand for homes. That's a tall order. Thus, it is reasonable to conclude that the possibility of a few years of drop in housing prices will be dwarfed by the virtual certainty of housing values going up manifold over the lifetime of a typical home buyer.

Some experts are quoting an annual return of 12-15 per cent over the next six to seven years despite short-term dips. If these forecasts materialise, not many would be complaining.

5. Reverse mortgage

The great thing about owning your own home is that if you need the money in the future, you can always unlock its value - even without moving out. With reverse mortgages coming to India, your home can become a financial planning tool for your old age, especially if you have paid fully for it by then.

What is a reverse mortgage? In a conventional mortgage, with every EMI that you pay, your equity in the house increases. Once you have paid up the entire loan to the housing finance company, your equity in the house will be 100 per cent.

In a reverse mortgage you do the opposite. You pledge your house with a financing institution that pays you a monthly amount based on factors like your age, value of your house and so on. Proposals for implementing reverse mortgage in India are being prepared by the National Housing Bank.

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