One of the most important goals of individual is to buy a dream home. As soon as one starts his/her career, the first thing in his/her mind will be to buy a dream home or to buy a bigger home compared to present one. In today’s time people would also like to buy an additional home for investment. This is because of the three major benefits,
1) Home loans are available very easily and the rate of interest are also competitive compared to other loans
2) Tax benefits are available for the payment of principal as well as for interest.
3) People also look this as an investment option for long term, as real estate investment has given very good returns in last 5 years.
People also let out the additional property purchased for investment and also earn rent on let out property. Thus, part of EMI also comes from this income generated from the investment. Mostly people take home loan for a term of 20 years and above. This gives them maximum loan and also EMI comes with in their payment capacity.
Housing loan is also a DEBT and one should be very careful before taking this. Everyone knows that in the initial years interest part is more and principal part is very less. Still people plan to repay the loans in 5to 7 years term. The following break up of interest and principal will help us in understanding the impact of interest on our investment & consequences of prepaying the loans at early stage.
Most of the borrowers do not understand the impact of interest payment and apply for loan. I have seen our clients having their investment in 8% in F.D.’s and Postal Schemes and still going for home loans @ 11% and above. I always advice my clients to redeem such investment and repay the higher interest loans for savings for future goals.
You can see from the below table that your interest part is more than 85% in first 4 years and most of the people plan to repay the loans between 5 to 7 years. This results in payment of higher interest in the initial years and also penalty for pre closure of loan. One should continue these loans till end and also enjoy the benefits of lower interest at the end of the term.
Loan Schedule for 50 Lacs for 20 years @11.50%
Term
|
Loan Amount
|
Monthly EMI
|
Total Payment
|
Interest Payment
|
% of EMI
|
Principal Payment
|
% EMI
|
Outstanding
|
1
|
50,00,000
|
53,321
|
6,39,852
|
5,69,468
|
89
|
70,384
|
11
|
49,29,616
|
2
|
49,29,616
|
53,321
|
6,39,852
|
5,63,070
|
88
|
76,782
|
12
|
48,52,834
|
3
|
48,52,834
|
53,321
|
6,39,852
|
5,56,671
|
87
|
83,181
|
13
|
47,69,653
|
4
|
47,69,653
|
53,321
|
6,39,852
|
5,43,874
|
85
|
95,978
|
15
|
46,73,675
|
5
|
46,73,675
|
53,321
|
6,39,852
|
5,31,077
|
83
|
1,08,775
|
17
|
45,64,901
|
6
|
45,64,901
|
53,321
|
6,39,852
|
5,18,280
|
81
|
1,21,572
|
19
|
44,43,329
|
7
|
44,43,329
|
53,321
|
6,39,852
|
5,05,483
|
79
|
1,34,369
|
21
|
43,08,960
|
8
|
43,08,960
|
53,321
|
6,39,852
|
4,86,288
|
76
|
1,53,564
|
24
|
41,55,395
|
9
|
41,55,395
|
53,321
|
6,39,852
|
4,67,092
|
73
|
1,72,760
|
27
|
39,82,635
|
10
|
39,82,635
|
53,321
|
6,39,852
|
4,47,896
|
70
|
1,91,956
|
30
|
37,90,680
|
11
|
37,90,680
|
53,321
|
6,39,852
|
4,22,302
|
66
|
2,17,550
|
34
|
35,73,130
|
12
|
35,73,130
|
53,321
|
6,39,852
|
3,96,708
|
62
|
2,43,144
|
38
|
33,29,986
|
13
|
33,29,986
|
53,321
|
6,39,852
|
3,71,114
|
58
|
2,68,738
|
42
|
30,61,248
|
14
|
30,61,248
|
53,321
|
6,39,852
|
3,39,122
|
53
|
3,00,730
|
47
|
27,60,518
|
15
|
27,60,518
|
53,321
|
6,39,852
|
3,00,730
|
47
|
3,39,122
|
53
|
24,21,396
|
16
|
24,21,396
|
53,321
|
6,39,852
|
2,62,339
|
41
|
3,77,513
|
59
|
20,43,884
|
17
|
20,43,884
|
53,321
|
6,39,852
|
2,11,151
|
33
|
4,28,701
|
67
|
16,15,183
|
18
|
16,15,183
|
53,321
|
6,39,852
|
1,59,963
|
25
|
4,79,889
|
75
|
11,35,294
|
19
|
11,35,294
|
53,321
|
6,39,852
|
1,02,376
|
16
|
5,37,476
|
84
|
5,97,818
|
20
|
5,97,818
|
53,321
|
6,39,852
|
38,391
|
6
|
5,97,818
|
94
|
0
|
If you are a buying a dream home for your genuine need, than you can still go for a loan and plan accordingly. But, if you are buying this for investment than you should be very much careful. Real estate is also an asset class, which also runs in cycles and what goes up has to come down. People have forgot the crash of real estate market in 1993. The real estate investment has very legal complications and also has many charges like brokerages, stamp duty, registration and transfer fees. The real estate market is also not well regulated compared to equity market, still people feel comfortable in investing in real estate. People also forget to balance between the different asset classes and ignore asset allocation, which is the base on any investment decision. The history says that equity has given more returns than real estate. It is very strange that people ignore the equity as a asset class, even though our GDP growth is above 8.5% and likely to touch double digit in coming years. SO BELIEVE IN INDIA AND INVEST IN INDIA.
This article first appeared at myiris.com on 10th December' 2010
