Is taking a Home Loan a Financially Prudent Decision?

Buying a house is?an emotional decision for most of the Indians.A person who owns a house is considered financially secure and is a Hot favourite of any future mother-in -law. In China,this is also known as the Mother In law economy.We know what is happening in China today but more on that later.

An average ticket size for a 3BHK apartment in a metropolitan city in India can cost anywhere from Rs 1 crore to 1.2 crores?(excludes Mumbai). Lets for calculation sake, take that you will get the entire cost ?of the house as a loan from the bank at 8% fixed rate of interest.The bank has pardoned your processing fee.

You will save on the rent which you would have otherwise paid for this 3BHK.I have taken the rental yield of such a flat at 2.4% though the median rental yields in India are only about 2%.Technically the house belongs to the bank till the time you pay off the loan so now you are paying the rent to the bank instead of the landlord. There are many subjective points like shifting for purpose of job not only from a city to another city but also within the city.For egs In Pune-I may like to shift from VimanNagar to Hinjewadi if my place of work shifts from Kharadi to Hinjewadi.This is because of the major traffic issues in our cities.The properties are not appreciating because of oversupply in most of the geographies.What is happening is the per square feet rates aren’t increasing but the FSI is increasing in all cities.This is leading to major oversupply issues.There are many other points but we will try and restrict ourselves to only the Financial part-Is taking a Home loan to buy a house a prudent decision or should one invest the EMI outgos in equity?

So Lets say I buy an apartment costing 1 crore and take a home loan on the same.Its definitely a warm and fuzzy feeling and now on I am not at the?perceived mercy of the landlord who may tell me to vacate the house.

My EMI comes to Rs 83644/- per month.I would need to pay a maintenance to the society for Rs 3000 and would get an income tax benefit of Rs 60000 for the year. I would save the rent which I would have otherwise paid ie Rs 20,000 per month which is escalating by 5% every year so that I can finish off my loan early.

Now after doing all these actions-I end up finishing my loan in totality by the 168th month.This comes to 14 years.By this time I would have paid a total of 1 crore and 40 lakhs to the Bank.

Now that I am paying Rs 83644/- would mean that my cash flow can take care of this EMI.Now lets invest Rs 83644 every month in a well selected Mutual Fund/Equity ,which can generate 15% CAGR.Mutual funds with a decent performance have given this return.This percentage is only a median and there are a number of MFs which have given return from 17% to 20% CAGR.

We reach the lumpsum figure of 1 crore in 6 years and 2 months.Lets say that the property is in a decent location and is bucking the trend by having appreciated by 25%,we reach 1.25 crores in 7 years.This is exactly half of the time needed to repay the loan.

I fully realise that Indians are very emotional about real estate and would have a host of questions.It would be great to discuss them in the Comments section.

I can fwd the excel sheet in case you provide me your email.

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