Things to consider before taking a home loan

Everyone who does not own his/her flat, always think of one question, 'Whether to stay on rent or to buy own house'. Everyone has different opinions, different calculations. Those who holds enough money, buys their dream house irrespective of any calculations. Some persons fulfill their dreams by taking a home-loan. So, if you fall in the first category it is good for you and go ahead to fulfill your dream. But if you are not amongst those lucky ones and planning to take a loan, then better stop for a moment and think again.

Some Questions and Calculations

Now, you must do some calculations and also check whether you are into your own business or working under a boss. In case you are a working guy like me, you never know when you may have to switch your job and relocate to another city. If you need to relocate, you will be having two options:

- Stay on rent in another city and continue your home loan

- Sell your home and buy a new one in another city

For the option one, ask yourself, can you really afford giving away rent along with your home loan? If answer is yes, that’s really great and you must be living a happy and comfortable life. But, I believe most of the persons would not be able to say ‘Yes’. So, only option left with them is to sell off their home, but now you are not very sure how much money you will get for your home and in the recession like situations, you are likely to get much less price than you would have paid.

Now let us take a scenario where no such circumstances occur and you stay in your house for around 20 years even though it is quite unlikely to happen if you are in a job.

Suppose you have bought a house worth Rs. 4,000,000/- ($80,000) in India and took a loan of Rs. 3,200,000/- ($64,000) for 20 years at 12% interest rate.

Initially you have paid Rs. 800,000/- ($16,000) from your pocket for down payment plus some charges for Stamp duty and registration charges. Total will add up to Rs. 1,160,000/- ($23,200).

As per 12% rate of interest, your EMI would be more than Rs. 35,000/- ($700).

Total EMI amount after 20 years will be more than Rs. 9,600,000/- ($192,000).

In India, you will get tax exemption on home loans, so you can save around Rs. 2,000,000/- ($40,000).

Initially you have paid Rs. 1,160,000/- ($23,200), so if you will calculate loss of interest at 8%, you have lost around Rs. 4,240,000/- ($84,000).

This means your dream house has cost you Rs. 11,840,000/- ($236,800).

Are you sure you will get the same amount after 20 years or so?

Now consider if you have been on a rented apartment/flat with rent of Rs. 13,000/- ($260) per month. Every year rent increases by 10%, then you will be paying Rs. 7,400,000 ($148,000) in 20 years.

Initial deposit you will be paying is Rs. 25,000/- ($500).

Tax benefit you would be receiving on house rent will be Rs. 1,550,000/- ($31,000).

Interest amount that you will be losing for 20 years would be Rs. 91,500/- ($1,830) on the initial Rs. 25,000/- deposit.

So you would end up spending Rs. 5,941,500/- ($118,830) on rented house.

Now compare the amount you have spent:

For your own house: Rs. 11,840,000/- ($236,800).

For rented house: Rs. 5,941,500/- ($118,830).

On rent, you got nothing after 20 years, but you have your own house if you will buy one. Extra amount you have paid is Rs. 5,898,500/- ($117,970). This is the effective cost you paid for your home, seems to be a fair deal if you will get this amount after 20 years. But wait and look for another calculation.

EMI you paid: 35,000/-

Rent Paid: 13,000/-

Difference: 22,000/-

This amount you can invest monthly and can earn interest for 20 years.

So if you will invest the difference amount, you can invest some amount for 12 years and after that rent will be around 35,000 same as your EMI for home-loan. So if you will calculate the returned amount after 20 years, it will be somewhere near to Rs. 6,500,000/- ($130,000).

This is the amount that you will get with 100% surety without any risk even if there is another sub-prime crisis or so and now you may use this amount to buy your own house which is not 20 years old with less tension of getting relocated to another city at this age after 20 years. Another option you will be having to start some business with this amount and earn millions. What I will suggest is if your home-loan EMI is exceeding by 50% or less than your monthly rent, then you better go with home-loan and buy your dream home. Otherwise some one has truly said “Cash is King”.