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Buying a Home – One of the biggest aspirations

A house with four rooms – each room with a separate colour theme and
Picture of a Housedifferent furnishing setup. A separate room for kids with all their kid gizmos… And a living room with all costly gadgets… A modular kitchen to keep your better half happy and so on…. There is nothing wrong to have a dream of owning a warm cosy home. And to buy it as soon as possible is one of the first priorities of a person once he / she starts to earn a living.

 

Having a shelter for you and your family is a necessity and to fufill this necessity, buying a home is made an aspiration. Till the time this aspiration is not financially achievable, an alternative of taking a house on rent is considered a trade-off. Isn’t it true that the common term in hindi ‘Roti Kapra aur Makaan’ (‘Food , Clothing and a home to live in’) tends to dominate most of our thought process and where our energies as well as our savings are targeted upon to achieve. The more is our disposable income, the more we strive to better the quality of the so called ‘Roti Kapra aur Makaan’.

 

Where Aspirations Dominate Diversification

For some people, the aspiration of buying a house remains an aspiration for ever due to the ever increasing prices of the housing sector. Probably the most common reason behind the upward movement of the housing demand is an emerging (rather a richer) middle class society and the easy availability of credit from the banks. I can so clearly recollect that I aspired to buy a 2 bedroom flat in Gurgaon in 2004 which costed a mere 18 lacs at that time. I couldn’t affort it then. By the time I could afford it in 2010, the price of the same flat spiraled to a whopping 90 lacs. An average house in India now starts from somewhere Rs. 40 lacs (Four million rupees) to Rs. 60 lacs (Six million rupees). And you may agree that this is quite a lot of money for an average Indian. Probably for most of the people, this is their total saving of their entire life. An average Indian earning around Rs. 5-10 lacs per year saves a net of around 2-5 lacs. Even for a Rs. 5 lacs saving a year, it would take approximately 10-15 years of savings to buy a home or fully pay off the home loan taken to buy the property. And by the time you are retired – you have a home (having majority of your savings) and a few lacs in your PF account.

But the result is worth it. You then have a nice warm house (which would then call a home) to live in – a place where you and your family can relax after a day’s hard work!

 

Harsh Financial Reality  – Buying & living in a Home !

However with the ownership of a home, comes a harsh financial reality – the property in which you live is probably the biggest burden on your financial position. I can feel your eyebrows getting strained while reading my last sentence but allow me explain how and why does it matter to understand the impact of buying a home on your financial position and more importantly on your retirement.

 

There are two factors involved in owning a house :

Rental Income Yield

The rent for a residential property in India is approximately 2-4% of the value of the property. This is in sharp contrast to our western counterparts like USA or UK where the rent is approximately 6 to 7% of the value of the property. You can do this calculation for yourself in the area where you live. For example, an average 2 bedroom flat in Gurgaon at the time of writing this article (Jan 2012) costs roughly around Rs. 80 lacs. The same flat can be obtained on rent for around Rs. 25,000 per month or Rs. 300,000 per year. The rental yield over the value of the property is approx 3.75% (3lacs / 80 lacs).

 

Capital Appreciation

Along with the rent, the owner of the property also enjoys the appreciation in the value of his home which can vary from around 10-40% per year depending upon where a person is residing and the prevailing economic situation.  As the economy matures, the capital appreciation on house prices would taper off and may settle at around 10-20% per year.

Unfortunately, the appreciation in the value of your home in which you are living is not really relevant as you will probably never end up selling your home to encash the appreciation. So it does not matter if you bought a home for Rs. 20 lacs and it may be currently valued at Rs. 2 crore. The only thing which it may help you is by saving the rent cost which you may have paid if you did not buy and lived in that property.

 

Reverse Mortgage

A reverse mortgage is opposite of a mortgage or home loan. In case of a home loan, a person takes a loan to buy a home and then pays back to the bank in the form of monthly EMIs / Mortgage payments.  In case of a reverse mortgage, a person broadly transfers the ownership of a property to a bank and in return the back provides the respective person a part lumpsom amount and monthly payments upto the death as annuity. The person still lives in the property for the duration of this life as a tenant of the bank. After the death, the possession of the property is taken back by the bank which can then be sold in open market. Hence a property acts as a saving bank account which is tapped by a person on retirement.

In western countries, a house purchased by a person is considered to be their biggest saving which primarily funds their retirement. People generally don’t intend to gift their house to their children as an inheritance. Upon being retired, the house is sold or reverse mortaged (explained earlier) to fund their retirement until death. Hence a house is treated and actually acts as an asset !

Unlike western countries, in India a person buys a house to give him shelter and with an objective to pass it down to their children after death. The emotional ties come into play and in general a person would not consider selling their house to fund their retirement. Moreover the Indian financial markets have not reached a level of maturity to provide financial options to encash the savings locked in the housing markets. Hence your biggest saving gets locked forever in a property which though would give you shelter until death but no other financial benefit.

 

Is it all about the MONEY?

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.

 

Please do enjoy the comforts of your home and if you liked the contents of this article, invite me for a cup of coffee.

 

 

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31 Responses to Your House – A drain on your Finances

  1. Mahesh says:

    Now a days people are going for home loans which will surely end up in 15-20 years loan repayment with never ending harrasments from the bank. Good article as it may make us rethink the decisions…. :)

  2. SIVA PRASAD says:

    Hi,

    Article is good.
    My question is, why to use all our assets till our death and making our value zero after death. Our children may expect some thing through inheritancy.

    Thank You
    R Siva Prasad

  3. Banyan Financial Advisors says:

    Hi Siva,
    You have a valid point and hence you may have noticed that I did point out in my article that not all things are done for financial gains. However, as long as we are aware that the house in which we are living in would not serve any financial assistance, we should be fine. This realisation would assist in building more assets throughout our working life as our house may not serve us the motive to have post retirement income.

    I hope this answers your question.

    Regards
    BFA

  4. SIVA PRASAD says:

    Hi BFA,

    Then what should be the alternative. I mean, which asset we can purchase as an alternative to home,and also good in investment point of view ?

    Thank You
    R Siva Prasad

  5. Banyan Financial Advisors says:

    Hi Siva,
    You have a lot of investment options available in the market. Even purchasing a house is not a bad investment option – however it comes with a very high price tag!

    If you don’t have a big bank balance, start with investments into SIPs, PPF, PF, Equity shares.

    Regards
    BFA

  6. Anuag says:

    Hi BFA – Another excellent article I must say.

  7. Banyan Financial Advisors says:

    Thanks Anurag. I am glad you liked it.
    Regards
    BFA

  8. Anurag says:

    Hi BFA – Yes I liked your article very much as it aligns with what I think.

    I own a flat in Ghaziabad ( debt-free ) which is currently rented out as I moved to Pune last year. Here in Pune I am living in a rented property, so for me rent I pay here is almost knocked-off by rent I receive from my property. A few people including my parents seldom advice me to buy a property in Pune, but I have almost dropped this idea because:
    – Firstly property prices in Pune are sky-high ( which I feel are over hyped )
    – Secondly I feel even if I go for a 2BHK flat here, it will cost me around 45 lacs which is a big amount, considering I will take a home loan of around 30 lacs, I will be paying around 32K EMI at such a high interest rate.
    – On the other hand, if I invest this 15lacs ( downpayment for flat ) + EMI for flat somewhere else like in MFs, then I would be better off.

    Do you agree with my viewpoint as it seems to be aligning with this article? Have I understood it correctly? If I am wrong and making some mistake then please provide proper guidance and advice.

    Thanks in advance. Regards,
    Anurag

  9. Anurag says:

    Hi BFA – Yes I liked your article very much as it aligns with what I think.

    I own a flat in Ghaziabad ( debt-free ) which is currently rented out as I moved to Pune last year. Here in Pune I am living in a rented property, so for me rent I pay here is almost knocked-off by rent I receive from my property. A few people including my parents seldom advice me to buy a property in Pune, but I have almost dropped this idea because:
    – Firstly property prices in Pune are sky-high ( which I feel are over hyped )
    – Secondly I feel even if I go for a 2BHK flat here, it will cost me around 45 lacs which is a big amount, considering I will take a home loan of around 30 lacs, I will be paying around 32K EMI at such a high interest rate.
    – On the other hand, if I invest this 15lacs ( downpayment for flat ) + EMI for flat somewhere else like in MFs, then I would be better off.

    Do you agree with my viewpoint as it seems to be aligning with this article? Have I understood it correctly? If I am wrong and making some mistake then please provide proper guidance and advice.

    Thanks in advance. Regards,
    Anurag

  10. Banyan Financial Advisors says:

    Hi Anurag,
    You have interpretted my article in the exact spirit. However, there are so many conflicting thoughts by people who consider real estate as the only investment options – as it is physical and they can touch – associate with it.

    Buying another property is of no harm, as you would enjoy the capital gain associated with it (if you intend to sell it). If you don’t intend to sell it, then your offsprings shall enjoy it – probably sell it and enjoy it. It would though screw your diversification and leave with limited options to fund your retirement. Hence before buying a property please consider what other options do you have which you can use for your retirement.

    Regards
    BFA

  11. Anuag says:

    Thanks again BFA :)

  12. Jignesh says:

    Hello BFA,
    I have read it and found informative. Very informative.
    We NRIs dont know what we will do and where we will be settled after returning to india. So cant take the decision where we will have our home and where we will have property just for investment. In such case is it advsiable to invest in property?How to deal with that.
    We always dream of a good house at our town though we dont have job at that location, am i right?:)

    Regards

    Jignesh

  13. Hi Jignesh,
    You have a very valid point. Most of the NRIs anticipate of settling in India but don’t end up doing. Hence their real estate property in India ends up being more of an investment property. This article was more targeted towards people who are purchasing a home to live in and at the same time want to consider it as their asset.

    If you have funds, buying a property in India makes sense, but at the same time please try to have measures to safeguard the investment property. I heard a saying “Buy Land, it is no longer made”. From a long term it is one of the best asset class, but has its disadvantages of being illiquid.

    Regards
    BFA

  14. […] forces him to go out on the job in order to pay THE BILLS. You may want to read our other article Your House – A Drain on Your Finances before continuing ahead with this […]

  15. Nataraj says:

    Dear Friend,

    Please include the IT saving due to loss on house property and self occupied to arrive at savings percentage.

    When a house is given on rent, the tax savings can be around 1.5%…which is substantial.

  16. Hi Nataraj,
    You have an excellent point – however, you may appreciate that I am not trying to prove that house property is a wasteful investment. The figures mentioned in my article are all indicative.

  17. Abhishek says:

    Hi BFA,

    Thanks for sharing all the insides of loans.

    I have a situation and it will be great if you guide me in the same regards.

    I owned a flat in Pune and moving to Gurgaon..the rent which I will be getting by renting my 2BHK is Pune is 15K and the rent which I will be paying in Gurgaon for 2BHK will be near about 25K.In this case I will be ending up with excess 10K payment from my pocket plus the EMI.

    Is it a good idea to sell the property?

    Could you please suggest me what will the right step which I need to take in this case.

    Thanks in advance.

    Regards
    Abhishek

  18. It is not a good idea to maintain a property in India for rental income only. As rental yields in India are very less (closer to 2-3% of the value of the property). Things which you need to consider are :
    1. Your income vs total payouts (Gurgaon rent+ additional emi)
    2. Considering emi as your investment and not as additional payout – a portion of emi is capital payment;
    3. Tax benefit on interest on home loan;
    4. Capital appreciation on Pune property.

    If you have to shell additional 10K which gives you an option of owning a property which is gaining 10-20% per year – it is worth it. Remember that it is easier to sell a property, but v difficult to buy one. As long as your property is in a location which will get it good appreciation, keep it. If it is too much of a burden on your cash flows, then consider about selling it.

  19. gopal joshi says:

    EXCELLENT ARTICLE

  20. Kausik Chattopadhyay says:

    I have gone though the hyperlinks one after another and would like to thank BFA for their time and insights in simple readable worldly language conceivable to people with non finance background. More ofen whenever I started with other articles, I ended up dropping midway due to their complexities and overused jargon s. These are really a wonderful array of articles.

  21. Shahrukh says:

    Dear BFA,
    I am new to your web page , but have found your articles very interesting and things have been explained in a very simple words , understandable to Non- finance background person.
    Do I have to enroll myself for questioning.
    Tks & Brgds
    Shahrukh

  22. Thanks Shahrukh,
    I have added you to my subscribers list. You will receive an email to confirm. You can ask questions on the blog at any time.

  23. veera says:

    Very interesting Articles .it helps me a lot to understand and made some important financial decisions

  24. Ali says:

    Hi,
    I have read your article, it is infact very very informative as sugested by everyone.
    I am planning to purchase a house, wherein i am investing 60% of it and the rest on home loan, of 10.15%.
    How do i go about it as do not have an idea about the bank loans, how they work. I have no idea as the interest rates ( Floating or fixed rate for the entire tenure. ) Please advise. As i will be taking a loan onf approximately of 10 lac or 12 lac.

  25. Ali,
    This is a big topic to be answered via a blog query. Please could you get in touch via our email info@banyanfa.com with your contact details ?

  26. Gowri says:

    Hi BFA ,

    I am planning to take home loan to extend 1st floor . The loan amt is around 8L , the monthly EMI is 10,500 for 15 years . My monthly income is20K , is a good idea for me to take this loan ?

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