Generally, we are advised by our well-wishers to buy a flat at young age through a home loan.
Now-a-days, many builders have tie-ups with Banks, which offer home loans. I just want to discuss the positives & negatives of buying a flat with a home loan @ young age. And these are my own views based on certain facts, figures and experiences and if it helps you in making your decisions in future, I would be glad.
Let me first start with the positives.
- You will have your own home. Its an emotional comfort and a status in society to have our own house/flat
- You will get tax advantages u/s 80(C) for principal & u/s 24 for Interest paid on the loan
- In future, even if you lose your job in the worst case or if your finances go for a toss, still you will have a roof over your head (but still the outstanding loan has to be paid)
- Its a physical asset (Tangible asset), which can be seen/felt.
- You can save on rent
Now let me get to the disadvantages of taking a home loan @ young age:
- You can save on rent. But rental yields are very low. Rental yield is Rent p.a / Total flat value. It is around 3-4% in Indian cities. The loan interest rate will be around 10.5% (this is the average loan interest rate, actual rate will keep changing as per the market interest rate scenario) over the full tenure of the loan. So, to save rent of 3-4% of the property value, we are buying the flat and paying EMI @ 10.5%. Is it wise?
- You need to pay property Tax every year.
- You have to spend money on flat maintenance frequently
- Maintenance charges to be paid to Apartment society
- Registration charges & Stamp duty have to be paid while buying & selling the flat
- Capital gains tax of 10% has to be paid on the profit while selling the flat
- While selling, chances of getting full money in white is very low. The amount received in Black cannot be accounted on your PAN, which means you can never use it legally. Either you have to spend it off (for example on your son’s or daughter’s marriage) or invest in another real estate property and pay it as Black component.
- Generally, EMIs are 50 – 60% of take home salaries of people. It makes the financial situation very tight. Your financial freedom is mortgaged to bank for the loan tenure (approx 20 yrs), which means most of your work life is dedicated to paying Bank EMIs, making the bank richer.
- Its difficult to make any other investment and will hinder & delay wealth creation
- You cannot invest for important goals such as Children’s marriage, higher education, retirement, foreign tour etc.
- You can’t leave your job, if you want to start your own business or to go for higher studies
- You will not have the flexibility to shift to a new location within same city to move near your company location
- Its a big decision, which impacts your financial freedom for a lifetime and this decision cannot be reversed easily
- If you shift to some other city due to your job requirement, then the flat has to be given on rent. Its difficult to maintain the flat from some other city, which will force you to travel frequently
Now, coming to figures: Please see below tables
|Home loan interest rate||9.7%|
|Loan tenure||20 yrs / 240 months|
|Flat value||Rs. 5000000|
|Loan value||Rs. 4000000|
|Flat cost||Rs. 5000000|
|Construction component||Rs. 3000000||Construction component of flat value will not appreciate. It will only depreciate as flat becomes older. May be after 30 yrs, you may not find a buyer for the flat as its too old and people would like to buy new flat instead of a 30 yr old one|
|Land component||Rs. 2000000||For example, if an apartment has 30 flats, then what you will receive is 1/30th of the total land area whenever the apartment is destroyed / collapsed after 30-40 yrs. So, what you will get eventually is only your share of the land. And land appreciates in value over time.|
Your flat value is 50 lakh and only 40% (20 lakh) of the flat value (which is the land) is appreciating over time. Land appreciates @ ~ 13.5% p.a, as the historical data shows. But you have to pay Capital Gains Tax of 10% on the profit you make while selling the land, which will bring down the returns further and if you consider the property tax, maintenance charges, registration charges, stamp duty, broker commission etc., the returns will further come down.
|Land cost now||Rs. 2000000|
|Land appreciation rate||13.5%|
|Land value after 30 yrs||Rs. 8,93,11,183|
|Capital Gains / Profit||Rs. 8,73,11,183|
|Capital Gains Tax (10%)||Rs. 87,31,118|
|Land value (post-tax)||Rs. 8,05,80,065|
So, the EMI of Rs. 37809 for 20 yrs will result in a wealth creation of Rs. 8,05,80,065 after 30 yrs.
Now, if the same EMI amount is used to start an SIP of Rs. 37809 p.m. in a mutual fund. But, rent has to be subtracted from the EMI amount. Lets assume rent is 3% of the flat value. So, rent p.m is Rs. 12500. Net amount that can be invested post-rent is Rs. 25309 p.m. SIP amount p.m = Rs. 25309.
Historical returns from mutual funds has been in the range of 15 – 23%. Lets assume an average return of 17% p.a from SIP in mutual funds. Then the wealth created in mutual funds in 30 yrs is as follows:
|SIP amount p.m||Rs. 25309|
|Initial lumpsum / one-time investment||Rs. 10,00,000 (which is equal to downpayment in flat)|
|No. of yrs||30|
|Rate of return||17% p.a|
|Wealth created in 30 yrs||Rs. 47,91,38,643|
With the wealth created through Mutual funds, you can build your own house in a peaceful area, in some hill station and migrate there post-retirement, once you get clarity on where you want to settle down.
I believe staying on rent + doing SIPs in mutual funds is a better option in the long-term than buying a flat on EMI @ young age and mortgaging your financial freedom to a Bank.
Flat is not an investment because you are never going to sell it, its only an emotional comfort.