Investing in Land & Property is a Route to Financial Discipline..!

by Ms.Binaifer Jehani, Crisil Research .

Majority of people rejoice over the salary credit SMS they get towards the last day of the month. However, on the same or the next day, the auto-debit bank facility deducts equated monthly instalments (EMIs) in a neat electronic sweep, which leaves behind a smaller chunk of disposable income.

 A home loan EMI is part and parcel of deductions that we face, apart from regular cuts towards provident fund, gratuity, and property and income taxes.

While most people consider EMIs a liability, given that the dream home remains hypothecated to the lender till the loan is repaid, we may also label it as a regular deduction to create an asset, a mode of enforced saving and a tool that instills strong financial discipline.

Ms.Binaifer Jehani, Crisil Research

Not long ago, most people would reserve their retirement kitty for purchasing a house. Thus, a lump sum, comprising superannuation income, provident fund and gratuity savings, would find its way into real estate. However, privatisation of banks, deregulation of interest rates and availability of home loans at competitive rates has reversed the tide in recent times.

The real estate market today sees several young buyers, who may have just secured their first job, but are willing to hit the EMI button right at the start of their careers. In fact, parental influence proves to be a strong driver for property investments by the youth in India.

Banks, while assessing prospective borrowers, do account for their regular expenses and hence, ensure that the EMI does not take away more than 50-60% of their overall income.

Thus, the borrower gets accustomed to a regular deduction towards the EMI and only looks at the balance amount to fulfil all the other needs.

EMIs not only allow you to pay off the loan in a phased manner, but also, in many cases, lets you occupy the apartment, if you choose to. In this bargain, it fosters financial discipline within the borrower as she now endeavours to repay the loan much faster.

For one, an EMI leaves a lesser amount in your account, which can be spent on discretionary items. This helps prevent spendthrifts from leading an extravagant lifestyle.

Secondly, the responsibility of repaying a huge loan amount also urges you to use sudden windfall amounts, arising from inheritance or rich dividends from existing investments, annual bonuses, and other sources, to pay off the loan much before the tenor expires.

If you succeed in paying off the loan faster, you would be in a position to upgrade to a bigger flat, further invest in other properties and accrue a larger kitty upon retirement.

Real estate allows you to monetise and own assets simultaneously. 

Notwithstanding the financial burden imposed by EMIs, the actual asset being created offers the buyer far more flexibility than other alternatives. As compared to other forms of investments (fixed deposits, mutual funds, equities, gold, and others), property, while being immovable, offers both tangible and intangible benefits.

Here, it is pertinent to note that while other assets such as gold, FDs and mutual funds have to be monetised to reap the returns, with a house it is not so. The buyer can choose to occupy the property or alternately, lease if out and generate a regular rental income.

One may choose to start investing via systematic plans, but sudden expenses and soaring credit card bills could act as a dampener of sorts. This may prompt you to discontinue your investment plans or defer them for a future date. Comparatively, EMIs do not offer such an easy exit route.

Further, instruments such as bank or company FDs, mutual funds or equities are easier to redeem, with returns reaching you sooner. On the other hand, selling a real estate property is a far more cumbersome process, which involves hunting for a buyer, seeking the right price and further channelizing the sale proceeds.

Considering these aspects, buyers themselves hesitate to sell the property and tap alternate routes to raise funds, when faced with a need. While they desist from liquidating their real estate investments to meet short-term contingencies, the property acts as a stronger hedge against inflation, with a potential to meet big ticket expenses in the form of education or marriage of children or medical treatment.

In India, growing population, coupled with shortage of housing facilities, ensures steady demand for residential properties, thereby promising adequate returns to home buyers. What home buyers also need to acknowledge here is that the appreciation is not limited to real estate prices, but also the rate at which their savings grow.

Thus, if we look at the lifecycle of a home loan borrower, the concept of EMI helps her start early, control spends, achieve financial goals faster and possibly, even gain from an appreciation in real estate prices, both in notional and actual terms.

About the author..!

Ms. Binaifer Jehani is Director at Crisil Research .

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