Time cost of house / housing loan

Hi Friend,

Major investment in the initial days of one’s career for a majority of the salaried class will invariably be a house. 

It happens due to a variety of factors like pressure from family members, peer pressure, to save taxes etc.,

In most cases we need to take a housing loan to buy a house. 

Obviously buying a house by investing huge sums and also by taking a loan is a crucial financial decision, but somehow it seems that not many people evaluate financial implications / understand the financial implications of taking the decision properly. 

Let us check two major reasons given to buy a house and their veracity to understand the impact of buying a house so early in our career.

1. Financial Reasons: 

These mainly include saving taxes, rents etc., 

The logic being given is the rent that we pay will easily compensate the EMI and we will be left with the house in the end. People tend to forget the calculation part of it. 

A double bed room flat that costs Rs.45,00,000/- to buy would cost us Rs.15,000/-monthly (approx.) if rented. 

That is a rental yield (annual rent / apartment market value) of 4%. 

Wherever we are in the country, in a majority of cases rental yield would be in the range of 4 - 6%. 

To buy a Rs.45,00,000/- apartment, the down payment requirement will be around Rs.10,00,000/- and a loan of Rs.35,00,000/- for 20 years would result in an EMI of Rs.35,000/- (Approx.). 

Running the calculation on the following link would tell us the total amount that we have to pay for the loan.

http://emicalculator.net/

Even if we take an optimistic estimate of the value of the apartment after 20 years it would hardly beat the amount that we put in.  So, financially it may not be so wise a decision.

2.Emotional reasons: 

We certainly like to have a house of  our own for psychological comfort. But, one question that troubles me is that, are we really so attached to the house that we buy? 

If it is really the emotional attachment let us ask ourselves a simple question. Do we like to live in the same house that we bought in the initial stages of our career even after accumulating a wealth of Rs.20 crore or even more? My guess is, not many people would. Or is it the fear of losing money in other investment options that forces us to buy a house?

Whatever be the reason there is a cost associated with every financial decision. 

Let us try to find out the cost of buying a house early in one’s career.

A person(30 years of age) decides against buying a house:

Instead of taking a housing loan and buying house, let us assume, a person decides to invest the initial down payment of Rs.10,00,000/- in Equity based mutual funds until after he retires (say for 30 years). 

Let us also assume a compounded return of 17% (last 30 odd year return of SENSEX) on this investment. 

That would grow into a corpus of Rs.11,10,64,650/- . 

Please make use of the following link to do the calculations,

http://www.moneycontrol.com/planning_desk/planning_magic.php#

Another person(30 years of age) goes for housing loan: 

If a second person takes a housing loan, he will be left with little capital to invest as his / her initial earnings will be completely consumed by a housing loan normally. 

Let us assume the second person invests the same Rs.10,00,000/- after 20 years (after repayment of housing loan). 

He will be left with 10 years only until his retirement. 

At the time of his retirement with the same 17% return assumption he / she would get Rs.48,06,828/- .

The difference in both these cases is more than Rs.10 Crore and that is time cost of buying a house. 

We tend calculate tax benefits, saving in rents etc., but time can be really costly as the above example shows and should never be ignored in investment decisions.

As a majority of us ignore the importance of time, we tend to buy house so early in our careers and rob ourselves of an opportunity to be rich and financially safe. 

Shall we commit the same sin?

Happy investing.