If there was a ranking in India for assets, property and gold would be at the top of the list. While gold is something that you can buy in bits and pieces, a property is a huge investment and for most salaried employees, this means taking a home loan. Now, unlike other kinds of loans, people are encourage to take a home loan for two main reasons -
1. You can claim tax benefits on the EMI you pay
2. A home is an appreciating asset
While the first part is absolutely true, the second part is debatable. A asset is usually something that brings in a constant cash flow to its owner. In the case of a home, this is only true when you give it out for rent. If the property you've purchased is still under construction, the home loan is something you have bear in its entirety.
The counter argument to this point is that a home appreciates in value; a home that was 30 lakhs when you purchased it 5 years back could be worth twice its amount. But while making this statement, you must also think about how much of that money has been spent in paying interest in your EMI. Most of your interest on your home loan is paid off during the early years of your tenure and that component will take up more than 3/4ths of the increase in value of your asset.
Besides if you think your home is an asset, try not paying the EMI for your home for 3 months and watch how the bank takes over your property looking to sell it to the next buyer.
When should you take a home loan?
The average Indian has a bad habit of making emotional investment decisions. This is true especially for gold and property. You should only take a home loan if both of the following conditions are met -
1. The monthly EMI of the loan is less than 30% of your monthly salary
2. When ratio of the cost of buying a property vs the cost of renting it is less than 15
For example, if you want to purchase a home worth 1 crore, but the rent of the same house is 20,000 Rs/month i.e., 2.4 lakhs a year, the buy/rent ratio is 41. This clearly shows that it makes more sense to rent the house rather than buying it.
But if you have taken a home loan or you have found that perfect home that you just can't miss, there is a way to make a profit from your home loan.
A golden hack
If you have been watching TV recently, you would have seen a lot of Mutual Funds advertisements. This is a brilliant way to minimise the loss from paying interest to the bank. Here are some pointers that can help you do this -
1. Say you're willing to pay an EMI of 60,005 INR for a 70,00,000 load for a period of 20 years at an interest rate of 8.35%
2. Look for the highest tenure possible; this will reduce your monthly EMI cost. Banks today allow a tenure of upto 30 years, especially if you're young. This brings the EMI for the same loan down to 53,082 INR at the same interest rate. You now have a difference of 6923 INR every month.
3. Put this extra money in mutual funds or an SIP for the same tenure. Assuming a 18% annual growth, your accumulated wealth for the same tenure will be Rs 2,19,45,313, adjusted to inflation. In this time, you would have paid an interest of 1,21,09,367 for your loan, making you a profit of Rs 98,35,946.
Now, this is a best case scenario and returns from SIPs and Mutual Funds is dependent on markets. But if India continues growing the way it is now, with this method, you will be able to recover a significant portion of your interest amount.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.