Do you know that 4 out of 5 employed persons live in rented apartments and do not even think of buying their own home?
The other day, at a departmental store, I overheard a young couple having heated discussion about whether to shift to a 4 BHK apartment, after their second child was born.
“Additional cost will have to be incurred as rentals would increase,” the husband was trying to explain to his wife. “But how can we continue in our small three BHK apartment? “his wife quipped with a shrug, “the children will need additional space to play & grow up .”
“We have the funds, but not enough to buy our own house. If only we can save on these rentals!” sighed the husband, “may be after a couple of years …………”
I could not resist from intervening, took out my card and giving to the gentleman, I introduced myself, “I am sorry but I overheard your discussion. We need to meet. Maybe, as a financial advisor, I can help you in planning your finances to purchase your own house.”
Surprised, the couple gazed at the card & then looked at me. “Well I am Shekhar, I am employed in IT, glad to meet you,” he hesitantly shook hands & I could see a sure unwillingness in their eyes, and anger too on being intervened by a stranger who was overhearing their personal conversation.
“Well, you can call me to fix an appointment,” I told them as I moved away to complete my purchase at the store.
As I had expected, owning a house was not a subject to be disregarded, the phone call came two days later and I was sitting in the comfort of my office that Friday evening facing the still suspicious couple Mrs. & Mr. Shekhar.
Everyone wants to own a Dream Home!
I made them relax over a cup of coffee until they opened up.
Purchasing a home can be both exciting and stressful. You need to keep looking for that one home, which feels right for your family and for your budget.
Mrs. Shekhar started conversing earlier than expected and then it was easy. We discussed regarding their savings & the monthly income, their family, their budget, their expectations, etc.
It seemed to me that they were a happy couple but something was missing in their life — they wanted to have their own home but were worried over the finances, they could smell some financial insecurity, that something was going astray and they did not want to compromise the upbringing of their children, which naturally, was their priority. They were not able to plan their house.
Obviously there are many permutations and combinations, and each case is unique and requires individual analysis, calculation and guidance.
The Home Loan:
In the excitement and pressure of finding the dream home, many people are not able to buy a home as they overlook one of the most important aspects of home buying — the home loan.
Mrs. & Mr. Shekhar had liked a ready for possession, beautifully constructed 4 BHK apartment costing Rs. 90 lacs, about 2 km away from the city, of which Rs. 50 lac financing was available from bank.
The home loans terms were simple:
Down payment: Rs. 40 lacs
Bank loan: Rs. 50 lacs at the rate of 8.75% for a tenure of 20 years
Monthly EMI : Rs. 44,186/-
Total repayment amount = 44186 x 12 x 20 = Rs. 106,04,529/- out of which interest portion was Rs. 56,04,529/- and principal was Rs. 50,00,000/-
The High Interest Factor
The down payment was not the problem. Shekhar’s father had kept the sale proceeds of their ancestral house in a Bank deposit . This, along with their savings in the past ten years was sufficient to meet the down payment.
What was disturbing them was the interest portion of Rs. 56 lacs on the proposed loan of Rs. 50 lacs. Meaning that they will be paying , in all, Rs. 146 lacs for the house.
Home Loan EMI is perhaps the biggest monthly expense item for a number of people. EMIs typically comprise 40% of take home salaries of individuals. With such high EMIs, very little is left to invest for other financial goals. To purchase their dream house and to keep their EMIs affordable, people go for long tenor loans. However, not many people realize that longer the EMI tenor, the more you pay in terms of interest. This was the case with Shekhar too. The interest amount was seemingly very high.
It makes Sense to Convert Rent into EMI at the Earliest
Shekhar was paying Rs. 35000/- p.m. for his existing 3 BHK apartment. Rent of a 4BHK apartment in that locality was Rs. 45000/- p.m.
The EMI of Rs. 44,186/- was reasonable and there was no need for any deliberation.
The payment was a contribution towards one’s own home and thus an asset.
Rent is a perpetual expense and adds to nothing.
Making Your Home Loan Interest Free & Affordable
What I am going to suggest now can become a landmark suggestion for thousands of prospective loan buyers, if they go through this article.
The entire home loan became Interest Free & Home loan becomes affordable.
Yes, they decided to save a whopping Rs. 56 lac + interest on the home loan?
It is very simple and everyone taking a home loan can take this advantage.
We selected a Balanced Mutual Fund for Mrs. & Mr. Shekhar and advised them to invest only 0.1% of the loan amount in an SIP for the tenure of the loan.
They were to invest Rs. 5000/- only p.m. in the SIP for 20 years.
Total amount invested in 20 years= Rs. 12 lac
Accumulated fund in 20 years at 13% CAGR = Rs. 56,66,612/- which takes care of entire interest amount of Rs. 56,04,529/-.
You Can Do it Too
1. Convert your rent payments into EMI with near similar cash outflow.
2. Just invest a further 0.1% of your loan amount in a mutual fund SIP which gives stable returns.
3. Your Home Loan becomes Interest Free.
“The mountains were exciting, inviting me to roam,
But I am most happy, now I have my Home”