For most of the city dwellers having their own house is the lifetime dream. And the parents who failed to make their dream come true keep their wards repeatedly reminded of owning a house at all cost.
In the metro cities like Chennai, it is a great privilege to have a house of our own. There are other equally important reasons for those who live on rentals to think of owning a house because of strictly imposed terms and conditions as well as exploitation by the house owners.
However, if you ask those who have made their lifetime dream come true by owning a house with the help of house loans whether they remain happy about it, their answer is generally negative. There are more people who have sacrificed many other aspects in their life to have a house of their own. If it is so then the real question comes to our mind whether it is going to be a burden to have one’s own house. We approached Mr. B Padmanaban, Finance Consultant, to learn how to have one’s own house without burdening oneself.
Nowadays, people are tempted to have their own houses as soon as they settle for a job and start earning a reasonable salary. Parents, friends, relatives as well as the daily advertisements, newspapers, and televisions are influencing us to opt for it convincingly. If someone yields to the pressures mostly it will lead to burdening oneself.
When one gets a job the salary at the beginning will be less. When one buys a house on loan, 50% of the salary amount will go to pay the loan on EMI. The family will run only with the remaining 50% of the salary. With the current cost of living it will surely be a burden for a family if it is forced to manage only with 50% of the salary after repaying the loan.
Moreover, when we buy a house on loan, we are forced to pay double the amount than the worth of the house by virtue of paying principal and interest amount. Added to it are the factors related to increasing day to day needs of our family, in terms of education and marriage of children that chase us to the brink of frustration. More than ever before the expenses are more towards addressing those factors. At this juncture, opting for a house loan immediately after getting a job will not be surely suitable for the future needs.
Besides, with the prevailing uncertainties, one could never be sure about continuing job only with one employer. We may get transferred to a different place. By impulsively buying an own house at the early stages of our career we might be forced to lose prospects of job opportunities in other places. Therefore it is important not to be emotional in owning a house. Owning a house should not be an obstacle for our career growth.
Many believe that money invested on land will never lead to the loss. But the current trend in real estate business is not appreciable. There could even be a chance to sell the house at a very meager rate after having realized the mistake of impulsively buying the house on loan. It is a big lie imposed on us that the value of the house will grow with time. It is a story of the past to sell a house bought for 25 lakhs for 35 lakhs after a period of 5-7 years. There are no such possibilities now.
There is a thumb rule to ensure the real estate is doing well. Considering that from today there is not a single house built and if it needs only 8 to 11 months for a built house to be sold it can be said that it is doing well. But at present, there are houses built already that could be sold till 46 months. And in many places, new houses are also being built. Therefore, at least for another five years, it is not a good option to invest in real estate. It is indeed a bitter and unwelcome truth.
House loan Vs Investment (Rs) (With Rs 25 lakhs worth house)
Monthly income 50,000
Monthly installment 25,000
Opportunity to save 19,000
Saving amount 15,96,000
Expected return 12%
Maturity amount 25,10,000
Income through investment (Rs)
One time investment 50,000
Monthly SIP 10,000
Income to get 12%
Maturity amount 24,63,964
Ok, are you asking how to buy one’s own house without any burden?
The only way is to invest on something without getting a loan for a house, at the beginning. As we all know that the benefit of compound interest is more with the duration of investment than the amount we have invested. In that case, it is prudent to earn through investments than buying a house on loan, which could never be profitable.
Even if we consider buying a house on loan as an investment the returns are very meager. Those who own a house would always want to live in it. So there is no income from it. For example, if one buys a house for Rs 25,000,00, monthly EMI for it will be Rs 25,000. But the same house can be had on rent for Rs 6000. At present, if one invests on a house the return on rent will be 2% at the maximum. If that is the case how will it be wise enough to have it bought for 9% interest?
At the same time, suppose it that one lives in a rented house and invests the loan amount on the mutual fund. And for that amount 12% income is received in seven years (in reality it may increase or decrease slightly). During these seven years, we would to some extent come to guess about our needs and also the place of our living. Similarly, we would also have earned a considerable amount. That is the suitable time for us to buy a house.
Further, one can think of buying a house only when one earns about Rs 40,000 per month. It is difficult for others who earn less than that to buy a house. For the one who earns Rs. 40,000 could spend Rs 20,000 on paying the installment at the maximum. Even if it is so, one has to spend Rs 5 lakh as initial payment.
Considering the current state of affairs, one can only buy a house in the outskirts of the city. It is difficult to have it rented for more than Rs 6,000. At the same time, if one gets a rented house for Rs 10,000 and invest the remaining Rs 10,000 on mutual investment, there is a possibility to gain Rs 24,000,00. So, it is wise to have it done that way to earn money from investment to buy a house later on without a loan rather than buying a house on loan at the early stages of one’s career and suffer all along. If an additional amount is required at that stage of buying a house one can get a loan only for the amount lacking. This is because that small amount of loan can be easily repaid considering the increase in one’s income during those periods of career growth. Thus he concluded.
Therefore, those who decide not to buy out of emotions, but decide after a well thought out financial plan can escape from the loan burden.
(This article written in Tamil by J Saravanan for Nanayam Vikatan in June 2017 has been reproduced in English by V Amalan Stanley)