Find A Best Financial Advisors For Home Loans in India
Buying a home is an emotional and aspirational decision for us in India. We aspire to buy a house so that when we retire, we do not have to pay rent. Also, having our own home means we just need to focus on other expenses to get by. How far is it true?
Let us take the case of Kartik who is a typical IT professional. He got placed at an IT major thru campus placement. Life has been a fairytale since the last 4-5 years. The learnings on the job, the hectic lifestyle, the peer pressure to be good at everything he did. He has been able to buy himself a hatchback car with his own earnings, has bought household articles that he has adorned his rented home in Hyderabad. But one thing that Kartik hasn’t been able to do and which he quickly wanted to knock off from his to do list is to buy that dream home. He is currently searching for a 2-3 bhk flat which would be 8-10 kms from his office, so he doesn’t spend a lot of time on commute. The range of a 2-3 bhk flat in and around his office cost anywhere between INR 40 lakhs to INR 1.5 crores, depending on which locality he chooses. Kartik’s salary account entitles him for a pre-qualified home loan of 50 lakhs, so he is looking for a flat which is worth around INR 60 lakhs. He has saved around INR 10 lakhs during the last few years for the down payment. He is all set to buy his dream home. Is there something he is missing before he takes the plunge?
Let us try to help him understand this better.
Ideally, on a Home Loans of INR 50 lakhs which has a repayment period spread over 20 years, Kartik would end up paying nearly INR 1 crore even at the lowest interest rate of 9.5% per annum. What that means is that Kartik would be paying 1 crore for a home which is worth INR 60 lakhs at current market value. The rental value of the property would be INR 10,000 to INR 12,000 at the moment. That means in a best case scenario, even if he puts it up for rent instead of staying in the flat he purchases, he would be making INR 1.44 lakhs per annum, which roughly translates to less than 3% return per annum. Yes, he would save Tax in the form of interest paid on the home loan. But it has an upper limit. The EMI that he would have to pay would be around INR 65,000 pm, which is way higher than what he is paying as rent for the flat he is currently staying at. The rented flat is also worth around INR 60 lakhs. He is right now paying a rent of INR 12,000 pm for the flat and is enjoying the benefits of the flat without having a Home Loan on his head.
Should Kartik buy a flat or should he stay on rent till he finds something within his budget? In this scenario, Kartik is better off staying on rent, rather than buying the flat.
Buying a home should be an objective decision and not linked to emotions. We should keep aside the aspirational part of our human behavior while making the decision to buy a house, as we might be better off staying on rent on similar property, than to pay EMI to the Bank for 20 years. In any case, the Bank owns the flat for the 20 years we keep paying the EMIs for. So, whose house are you living in? Bank’s or your Owner’s?
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