Many people have a list of things they want to accomplish before they hit their 30s. Hence, if you have started putting together your list, and investing in a home before you hit your important milestone is on top of the list, then let us guide you through this journey.
Get your finances in order
While there are psychological benefits to investing in real estate, the financial benefits of owning a home are even greater. However, buying a house is a complex and expensive process, and arranging such a huge amount requires financial discipline.
First, calculate how much you can afford. To do this, first make a tally of the funds available to you as inheritance, savings, gifts, etc. Next, analyse whether you will be able to fund your house purchase entirely through your funds, or if you are going to need a home loan. If you would have to avail of the home loan then typically, this would be 4-4.5 times your net annual salary. Thereafter, chalk out how much savings you would be able to accumulate between now and when you plan to buy your house. Make sure this is a realistic estimate based on your current income, liabilities, and savings capacity.
Barring those in the high-income category, most young earners will find it difficult to fund their houses entirely through their funds. As a result, most young earners would have to avail of a home loan. However, the amount you can borrow for a property purchase in the UAE is determined by the Loan-to-Value (LTV) ratio.
For properties worth less than $1.361 million (AED 5 million), you can borrow up to 85 per cent of the property’s value, requiring a minimum deposit of 15 per cent. Properties over $1.361 million (AED 5 million) have a borrowing limit of 75 per cent, necessitating a 25 per cent deposit. Interest rates can be fixed or variable, and loan terms can extend up to 25 to 30 years. It is important to note that these terms can vary between lenders.
Strategic investment strategy
Depending on the time you have to invest and grow your savings will decide which investment instrument is best suited for achieving your goals. Individuals who have more than five years to build their down payment should invest in equity mutual funds through SIPs. Equities as an asset class usually outperform fixed deposits or other fixed-income instruments by a wide margin for investment horizons exceeding five years.
Longer investment horizons also allow equities enough time to recoup losses caused by the short-term volatility associated with equities. On the other hand, buyers should invest in fixed deposits (FDs) or other fixed-income instruments only if they wish to create their down payment corpus within five years.
Keep a mix of low-risk investment instruments like debt schemes and riskier plans like ELSS at varying maturity periods. Reinvest short-term plans as they mature. The motive is to accumulate money and not create wealth, so as you move closer to your desired amount or the deadline, then capital protection becomes paramount, and investing in FDs of stable scheduled commercial banks would be the best option.
Keep in mind
- Ideally, the value of the home should not exceed five times the annual household income of the buyer;
- Invest in high-yield fixed deposits or debt funds if you need to accumulate a down payment within three years; hybrid funds for an investment horizon of three-five years, and equity mutual funds for an investment horizon of above five years;
- It is important to find the balance between taking on a commitment that will put too much pressure on his income and going the extra mile in cutting back on expenses to acquire an appreciating asset.