House Loan vs Corpus Building

POSTED BY Sachin Kumar Nigam ON April 10, 2012 10:46 pm COMMENTS (37)

Hi

Everyone around me is taking home loan and buying a house… now as far as i understand repaying a home loan in terms of EMI costs one double or more by the time u finish the loan period… What i want to ask is what approach is better ?

1. Putting money in Diversifed equity fund for say 15 years with a SIP of 10K and then purchasing the house on downright purchase

ELSE

2. Get into the hojme loan trap and then forget bt MF SIPS as u a general salaried person wud then never have that savings to direct towards MF invstmt.

Iam 31 nd can save upto 20 K a month. Currently all savings is directed towards Equity MFs and ppf for the debt ..ratio as 90:20

I was forced to introspect as everyone ard is just hell bent to acquire home as an asset as world economy is too volatile and also the rentting vs owning house arguemtns…..jst wanted to be sure am i going in the right direction or not?

37 replies on this article “House Loan vs Corpus Building”

  1. sunny balwani says:

    Dear Ashal,

    The reason is the outskirt area where i am planning to buy flat is developing, there is no ready to move in flat in that area.The appreciation will be faster in that area and rates are less as compared to main city area. And i have to settle after 5 yrs not now.. so till that time this area will be developed as IT companies are building there offices,

    Still, I have not hard and fast mindset for underconstruction one … Can find good deal for ready to move in as well but it will comparatively costly .. what you suggest on the queries above?

    Regards,
    Sunny

    1. Dear Sunny, on any given day, I’ll prefer a ready to move in or about to complete property than a under construction one. there are too many stories even for prominent builders like DLF, Unitech….. who are unable to complete the construction work in time & the delay has been 4-5-6 years from the scheduled completion date.

      As you are reading my answers on forum, Iw’d ask to not use the retirement kitty of your father for real estate investment. Either purchase from your own resources or do not purchase at all. Practical solution for you if I assume for a similar price you are able to get a deal where the property is either ready or about to complete in next 3-6 months. Out of 26L Rs. Loan, Pay 7L Rs. from your own pocket. apply for 19L Rs. loan from SBI’s Max Gain (Please search the forum for some of prev. discussions on this Max Gain thing). Once the home loan is running, take loan from your father to deposit in to that Max Gain account & at the same time, please start paying at least interest to your father.

      Thanks

      Ashal

  2. sunny balwani says:

    Dear Ashal,
    Here is my profile.
    I got recently married, me and my wife both are IT professional earning 43k & 26K (in hand)per mnth respectively. Currently staying in Mumbai in rental flat.Planning to settle in indore my hometown within next 5 yrs.

    I am planning to buy in next 2 mnths.. under construction 2BHK falt (possesion in 1.5 yr) net current value 26Lacs in indore outskirts near to area where IT companies are building there offices which will be completed in next 3-4 yrs.Expecting tremendous increase in property value there in next 5 yrs. As of now this flat purchase is from both prespective investment & live in. As my current home at indore is small and its lease is going to expire in next 6-7 yrs.Need to check about its renewal.

    for 26L flat purchase , I am planning to pay 8L from my pocket as down payment &
    Take 8L loan from my father @ 12% for 10 yrs (EMI 11400 Rs) & Take 10L home loan from bank @11% per annum for 7 yrs (EMI 17200 Rs) , net EMI will be around 28K +1K falt maintainence=29K per month out of which 11400 Rs is coming back to my home as father(retired) & mother are staying with me. So payment from my pocket for EMI will be at max 19K per mnth.
    Apart from this currently I am paying 8K per mnth rent in mumbai
    so 19+8=27K and 20K monthly expenses= total expnse 47K. and total income 69K

    I have insurance permium of 50K per annum one LIC endowment 10L and one term plan 75l aviva.I have PPf account as well and few small FDs, No investment in equity yet.

    After taking this loan i will be having liquidity of 1 L in my hand, nothing else,

    After completion of this bank loan in next 7 yrs I will be of age 35. Then can plan for retirement. Should i proceed with this 2BHK flat buy plan.

    Or I can buy 1BHK flat in indore around 18L and put 3L of money in hand in equity.

    Or Invest in equity now itself and leave the plan of buying this flat as of now.

    Please provide your suggestions for same.

    Thanks & Regards,
    Sunny Balwani

    1. Dear Sunny, why you are not opting for a ready to move in flat? Please clarify.

      Thanks

      Ashal

  3. sunny balwani says:

    Dear Ashal,

    I am also in same dilema whether to plan for retirement or Buy a home. As per my planning now , with family financial support I will be able to complete home loan in next 7 yrs and will be having my own house to live in, my age is 28 now. So can start planning for retirement from age 35..still i will be having 20 yrs to invest till i became 55. So i think i should go for home loan now. Please suggest is this make sense.

    Regards,
    Sunny Balwani

    1. Dear Sunny, can you provide more details about yourself & your house cost, loan etc.

      Thanks

      Ashal

  4. Sachin Kumar Nigam says:

    iam thankful to u banyan………

    SM1 pls wake up manish frm his Slumber sleep!

    @ashal bhai he is ur close one …pls let him put his comments

    As far as i know he is fresh frm this issue as he has definately liquidated all his investments for a dream house …thats y nowadays he is is in SILENT MODE……He can for sure enlighten the masses much better,,,!

    1. Dear Sachin, For your Information please dear Manish is already checking all the forum posts & whenever he feels to come in, he comes in to post. Just look above – He denied for giving free down load of his JagoInvestor book. Where he is busy now a days, I do not know.

      As long as Forum is active from queries as well as answers for queries, you should not bothered where is dear Manish. 🙂 🙂

      Thanks

      Ashal

  5. Sachin Kumar Nigam says:

    Further here i just read article refered by banyan on the thread above…..just replicating the summary here:

    Your house in which you are living, though is your asset, but it is for your life time a dead asset. Having said that, not every decision taken by a person is guided purely on financial grounds. You don’t gift a jewellery to your wife / mother / loved ones in expectation of a financial return. On a similar note you don’t bring up children and give them the best / costliest education which your money can afford in an expectation of milk them in future. The purchase of a house or rather a home is also in many cases an emotional decision (at times). The motive behind this article is not to turn down the best decision of your life (of buying your home) but to make the readers ponder that their house purchase decision may not add to their financial independence post retirement. It may provide the owner with a shelter, but it may not provide you the much needed monthly income considering that you may not want to take a reverse mortgage on your house (or alternatively sell it) and leave your children / family stranded. Hence make sure that along with the monthly EMIs / mortgage payments which you are diligently paying to the bank, you also make a budget towards an investment pot which would fund your standard of living post retirement.

    It clicks with me well as i only have a daughter and plan no further child. These are difficult times and best for me is to have 1 offspring and provision best resources for her..:))

    as i do not expect to transfer any inheritence ..the summary makes sense to me…

    1. BanyanFA says:

      Thanks Sachin. Glad that you liked it and it reflected your personal situation.

      Regards
      BFA

  6. @Sachin – Some books are forever. It is a mere Rs. 335 in Flipkart which you will make in no time by applying even one of the principles in the book. Don’t download just buy it – it is a way to respect someone’s IPR.

    1. Sachin Kumar Nigam says:

      agreed!

      No showcasing this is just to convey how much impact this forum is having on a common investor…..

      I just ordered it on flikpart…

      Order No.: OD20411210375
      Order placed on: 11 April 2012, 9:31 PM
      Payment Status : Payment Successfully Authorized

      Order Details

      Sr Type Item Description Status Details Price Qty. Subtotal
      1 Book One Up on Wall Street: How to Use What You Already Know to Make Money in the Market – Peter Lynch,John Rothchild Processing
      Expected Delivery:
      By Apr 15, 2012 Rs. 335 1 Rs. 335
      Subtotal (1 item): 335
      Shipping: Free
      Total Amount: Rs. 335

      Thanks i will get back on this thread after i read it up.

      1. Ramesh says:

        Thanks Sachin.

        I am sure, you will love the book.
        Ramesh

  7. Sachin Kumar Nigam says:

    @ ramesh y cant i just download..:))

    TO confess i purchase manish’s book ” jago Investor” .which opened my eyes..frm flipkart…..now manish is offering a free download…..I was sorta annoyed for few minutes but then i realised later it is FOR THE BETTER…

    alerady a salaried person has so many obligations … and as its freely available .i jst wished i cud get a direct link thats all..

    b/w pls any1 pls wake up manish frm his slumber sleep.:)) ….i think not only me but at least few lakhs must be expecting his active participation in forum or his posts.!

    1. Ramesh says:

      Do you mean you cannot pay rs 335? You know that is a very small sum for that knowledge. Anyways whether you can afford it or not is not a question, piracy is not supported.

    2. Hey Sachin

      I am not giving any book for FREE download ? Who told you that ? There is one free ebook on term plan , but my book “Jagoinvestor” is not at all for FREE download 🙂 .. seems like some confusion !

  8. TheZionView says:

    For
    -A roof on your top
    -Asset which might come to ur rescue in later part of life.

    Against
    -You are stuck with the place no way out
    -Reduces you investment power

    You decide

    PS. I have a Home Loan and i am fortunate enough to still invest healthy amount for other goals.

    1. Ramesh says:

      Can you give details as to how it can come to rescue in later part of life? Selling a real-estate in distress is very tricky.

        1. Ramesh says:

          Maybe this is time for some detailed analyses and real-life values and the various restrictions which apply to Reverse Mortgage.

        2. Dear Justgrowmymoney, Reverse Mortgage is not an option for most of the young people. The reason is if the person is living in same house from his young age, by the time s/he retires it’s more than 20-25Y old house & as per the basic condition, age of the house should not be more than 15Y old.

          Yes if a person is purchasing in his 50s, the house may be used for RM within that 15Y window.

          Thanks

          Ashal

          1. Sachin Kumar Nigam says:

            phew ! Thanks guys for the reponses

            @ just grow i want to read that book but all google devs links are directing me to some chinese versions or some sites with 20 files to download the book…. i find time only in evening and iam too tired…..pls if u can provide me a direct link to donload the e book in one shot i would be thankful

            @ ashal iam currently in bhubaneswar…job is transfereable …i intend to purchase flat in Delhi …. No fancies jst 2 BHK ….. its 50 L in total if i purchase in the area i desire too… Gross is smwr ard 50 K …monthly in hand after taxes and pf is 40 K.

            @ banyan iam reading ur article right now it is very interesting..

            @ manish dada…..not many posts and no replies in the forum …seems like u r too busy in liquidating ur short term FD’s and buying that dream house..:)

            Life is hard guys but thanks to u all for a forum like this…!

            1. Ramesh says:

              Why not buy the book from say flipkart.com or any other.

          2. Jassi says:

            A really good discussions and I am sure many people will have this confusion.

            @Ashal, is this Reverse mortgage condition also valid for a house constructed on my own land.
            I understand apartment value depreciates, but how can reverse mortgage be calculated for house on a person’s own land.

            Rgds,
            Jassi

          3. Dear Sachin, @ 50K take home pay, you can service only 20-22K EMI easily. That means a home loan of some where around 22-25L Rs. only. How ‘ll you bridge the Gap?

            Thanks

            Ashal

          4. Dear Jassi, the construction date applies for self constructed property also. the reason is –

            At the time of RM if your property is already around 20-25Y old & under RM it ‘ll remain for another 10-15Y directly & beyond that till you are alive, bank can’t liquidate it’s money. So by the time both of you i.e husband & wife are no more & property is available for sell off, the real worth of property may not be what the outstanding loan liabilities is there under that RM.

            Hope it clear your doubts.

            Thanks

            Ashal

  9. BanyanFA says:

    Hi,
    I coudn’t resist from pasting this link which I wrote recently http://insight.banyanfa.com/?p=250

    Generally people consider a house as their asset and include it in their retirement planning. This is true as long as one is not living in this house. If you are living in this house, it becomes one of the biggest financial drain on your money.

    Regards
    BFA

  10. bharat shah says:

    i think , one should buy ‘a value home buy’ for living purpose particularly when one’s means are limited, that is, you are not so lucky with high salary or large inherited money i mean, you should not only think of newly built or under construction flat schemes, particularly in tier I and ii cities, where now a days, there seems rush of demand from investors, rather than the actual home seekers leading to unrealistic premiums .and the old 5-10+ yrs CONSTRUCTED FLATS ARE AVAILABLE at discount than their intrinsic value (i.e. value of the land pertaining +depreciated cost of construction ). i found that that discount could be more than 30%. sometimes you may get for less than its land cost and the construction, which would easily last another 25-30 yrs. would be free. i may seem to be exaggerating, but i am sure, you may find the same if you watch he reality around you.

  11. Ramesh says:

    Whatever decision you take, you should remain true to the conviction.

    In my opinion, it is not easy to shrug aside all pressures, from family and friends.

    The problem occurs when there is say a bear-market or a nowhere-going-market for 2-4 years. Then your inner confidence gets a real test.

    Financially, renting is a better option rather than being in debt, getting leverage, and buying a costly house.

    If you find a “reasonable” quality house with other important things like closeness to workplace / children school, etc. Then after due diligence, you can buy the house for own. But, for a goal of “sure-shot future appreciation”, without considering the cons of large debt liability, it is not at all an option.

    As a thumb rule, if you can put half the house’s total cost from your own side (not by borrowing from bank/friends), you have fulfilled the basic requirement of buying a house. Otherwise, forget it for now.

    People do not understand the problem of negative leverage (and since in the last 10 years or so, there has been significant appreciation, because of recency bias, it is difficult to make them understand).

    So, make a prudent decision and be happy.

    The same way, people say that stock market returns will never recur as they have been in the last 10 years, you can tell real-estate prices would not repeat also. But who knows about the future.

    Ramesh

  12. Sachin – There is no one solution fits all. But I am still writing this to kick start your thought process.

    For someone who already has a home loan my usual recommendation is to still invest in Mutual Funds because the returns can be higher and money must be invested where it works the most.

    However regardless of what anyone says there is nothing like a roof over your head. The last time around when this was discussed I told this forum about a research done in the US between 1970’s and 2006 that involved more than 50,000 individuals across the financial strata and the ones whose portfolio has performed well included all home owners. There is no conclusive evidence that home owners have a better portfolio but they have ‘reasonable’ temperament to withstand market shakes. This is just a hypothesis not conclusively proven [I will dig this link for you guys this time]. Also a liability should not necessarily be seen as a bad thing. For many people this even curbs their random spending spree with a thought that they have a liability.

    While advocating a BUY of the house if it eats away every single paisa of disposable income then it is very very risky.

    Since you are looking to buy a house with disposable surplus of 20k let me assume the EMI is 16k. Of this amount let me assume the interest component is 15k in the beginning at least. Then the annual interest paid is 1,80,000. If you are in the 20% tax bracket the annual savings in tax out go is about 150k*20% = 30K = ~ 2500 per month. Assuming this is a ready to occupy house and assuming you save a rent of 6k per month then the monthly savings is 6000 (rent saved) + 2500 (Tax saved) = 8500. So your true EMI outgo is only 16k-8.5k = 7500 leaving a healthy 12500 still available for investments. Actual numbers may vary. When your tax slab moves to 30% you save even more money.

    If you are in a Tier 2 city the chances are the home prices will only keep rising at least at 6-7% per annum on a very conservative estimate so even after 10-15 years you may just have money for part payment. And if you intend to use all the corpus for a house purchase there will be less money available for any other goal.

    Again in a Home Loan if you make 20% down payment then the 80% loan amount also grows for you (at that 6-7% long term rise). Also you rental place is never permanent. What if after everything runs smoothly the landlord asks you to move out in which case your kids school travel/your office travel/spouse’s travel can all go for a toss – perhaps increasing expenses big time there as well.

    If the numbers are intimidating then opt for a smaller house with much lower EMI outgo. And before you take a decision can you please read “One up on the Wall Street” by Peter Lynch and come back and update us. It makes very light reading and you will love I recommended it.

    1. Sachin Kumar Nigam says:

      phew ! Thanks guys for the reponses

      @ just grow i want to read that book but all google devs links are directing me to some chinese versions or some sites with 20 files to download the book…. i find time only in evening and iam too tired…..pls if u can provide me a direct link to donload the e book in one shot i would be thankful

      @ ashal iam currently in bhubaneswar…job is transfereable …i intend to purchase flat in Delhi …. No fancies jst 2 BHK ….. its 50 L in total if i purchase in the area i desire too… Gross is smwr ard 50 K …monthly in hand after taxes and pf is 40 K.

      @ banyan iam reading ur article right now it is very interesting..

      @ manish dada…..not many posts and no replies in the forum …seems like u r too busy in liquidating ur short term FD’s and buying that dream house..:)

      Life is hard guys but thanks to u all for a forum like this…!

  13. Dear Sachin, if you can face the family, friends. relatives & other’s pressure, please stay put in your MF investments & forget that home loan thing. You ‘ll be able to reap far higher returns & after 15Y or so, you ‘ll be in better position to purchase your choice of house on outright purchase basis.

    Thanks

    Ashal

    1. Sachin Kumar Nigam says:

      @ Ashal thanks……even one vote counts and iam happy the first reply came in my favour….!.. Truly to confess I was jealous…..everybody ard me owns a house and me..a rent bugger..!…..who will be winnning at the end of the day …..i mean 15 years is a damn long period……..isnt it?….jst hope some more possitive replies come in here…so that IAM FIRM AND STRONG IN MY CONVICTION .

      @ manish dada and r mohan & Ramesh bhai + just grow + wealth ucreate ….PLS TELL me if iam on right path.

      1. Ramprasad says:

        Hi all,
        I am also facing pressure to buy a house or land. I am earning a good salary and have been investing 20k in SIP. My only worry to buy a house is what will happen if I loose my job.

        Ramprasad

        1. Dear Ramprasad, you should put the same question to the persons (family, relatives, friends) who are pressurizing you for a house purchase.

          Thanks

          Ashal

      2. Dear Sachin, can you please provide details regarding the city you are currently living in, your mly income, rent you are paying & if the similar house in same location is available for sell, what ‘ll be your purchase price including all expenses (Basic price + stamp duty & registration charges + transfer charges etc.)

        Thanks

        Ashal

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