I am 40 years old and currently servicing an equated monthly instalment (EMI) of Rs55,000 for my outstanding home loan of Rs25 lakh. I can afford to pay another EMI of Rs45,000 with my current obligations. I also have a mutual fund corpus of Rs15 lakh which I want to use for making the down payment for another home purchase. My question is, should I buy another property given the present market uncertainties? Or, is there any alternative advice for me?
– Name withheld on request
Answer by Raj Khosla, managing director, MyMoneyMantra.com.
Covid-19 is a true black swan event and uncertainties continue to linger. It is important to make informed money decisions while protecting adequate liquidity for emergency use. First up, you should evaluate your cash flow requirements for short, medium and long term goals prior to making a borrowing decision for investment purposes.
Currently real estate market is buyer-centric. If you had wanted to buy property for self-use, you could certainly go ahead with the property purchase option and lock the best interest rate offer. However, with an existing home loan EMI to serve, you should refrain from aligning surplus funds for the purchase of additional property and escalating monthly EMI liability to Rs1,00,000.
You should not consume your present corpus for making a real estate purchase in the expectation of either value appreciation or for generous and stable rentals. Note that annual rental yields in the residential property segment are roughly around 2%. In the current disrupted scenario, there is the risk of not being able to find a good tenant. The EMI hit will continue relentlessly, even if the property is not earning any rent. Furthermore, price appreciation may take another 5-10 (or longer) years to materialise. So not a good idea to invest in real estate for rentals. Given your availability of funds, you are best advised to partially or fully prepay your existing home loan.
Alternately, it is pragmatic to consider benefits. Your monthly surplus of Rs45,000 could be invested in mutual fund SIPs. Avail of professional advice and determine your life goals and risk appetite. Accordingly opt for a good mix of short term liquid funds, bank FDs and long term equity funds to build a diversified portfolio. Regularly review and rebalance your investment portfolio.
Last but not the least, you should also commit an adequate cover for life and health insurance needs for self and family.
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