Akshay Shukla is a 42-year-old finance professional who owns a house in north Delhi. But since he, along with his wife, work in Greater Noida, they have rented a flat in the NCR town to avoid the long commute as well as mind-numbing traffic snarls.
Now, he is contemplating buying a second house closer to the workplace to save on rent, as well as to invest in the ‘future’ of realty. Despite a firm assurance from bank that he would be granted loan for 80 percent cost of house, he is unsure if he should ‘overleverage’ his portfolio.
His apprehension emanates from the fact that he already has a current loan. And if he decides to buy the second house in Noida now – he will be facing two EMIs at the same time.
Liquidity is key
Akshay believes that he can afford to buy the second house subject to the final loan approval, of course. But here is the catch – he will run out of most of his savings to pay the 20 percent lumpsum required.
Secondly, EMIs of his current loan are scheduled to continue for another six years.
In such a scenario, he will be hard pressed to manage the EMI burdens of two loans for longer than half a decade.
In other words, liquidity becomes a concern. After exhausting a large part of his savings on the second loan, it will be difficult to fund an emergency expenditure, say sudden illness or urgent house repair.
“Liquidity of assets gets restricted when a current EMI for the first house is still on. So, we usually advise our clients to avoid the decision of buying a second house,” says Sridevi Ganesh, co-founder of Chamomile Investment Consultants, Chennai.
Rate hike cycle
Another factor that should weigh on his mind is the future possibility of interest rate hikes.
In past three monetary policy meet, the banking regulator has already raised the repo rates by 140 basis points with greater possibility of one or two rates hikes in store. In such a scenario, the monthly instalments are likely to increase.
“When we are going through a rising interest rate cycle, the EMI burden is expected to rise further. In such a scenario, adding another EMI is foolhardy unless there is a radical change in your income pattern, e.g., increase in salary, promotion or a proceeds from a redemption, among others,” said Deepak Aggarwal, a financial expert based in Delhi.
Short term goals
There is no denying the fact that a long-term goal, at times, is achieved by sacrificing a number of short-term goals which are avoidable. But it is generally not a good idea to make too many changes at the drop of a hat.
In the above-mentioned case study, if Akshay has some short-term financial goal lined up, for instance, buying a new car, or holiday abroad then the desire to own a second home – which was not part of the long-term plan until a few months ago – can jeopardise these short-term plans and can even make his entire financial planning prone to unforeseen circumstances.
What if the future rate hikes turn out to be steeper than he has accounted for? Will the job that is set to finance the two EMIs remain stable enough in the foreseeable future, so on and so forth.
So, the financial advisors suggest that being ambitious is a good thing but it is not recommended to take excessive loans for wealth creation.
The ace investor and oracle of Omaha Warren Buffett has rightly said: “Never test the depth of river with both feet.”
Because if you go wrong, you won’t survive to even tell the tale.
