Unlimited Period Offer - Home "Loans" @ 50% Discount

Recently friends of mine were discussing the rush @ global brand Apparel store because of the discount that they were offering to the customers. A certain 50% discount made sure that people rushed to the store and the store ran out of inventory within a week. I was imagining if "a common need" product is sold@ 50% discount, wont the rush be larger.  Hence i decided to post it here. The common commodity that I'm talking about is a "Sontha Veedu" (own house) we all crave to buy. Sometimes i have seen people buying a house without having a plan for it and feel so burdened by the EMIs they have to pay especially in the initial years where their earning capacity is still limited and the interest outgo is high. 

Alright, let me get to the Story or to say correctly "Maths" of the Story! 

Lets assume the Average cost of apartment is 40 lacs. So a prospective Buyer has to first have a down payment of 15% ie., ~5 lacs in hand. Then further he will go for home loan of 35 lacs (40 lacs - 5 lacs down payment). 

Points to be Noted - 

To Buy a house worth 40 lacs - 
1. The Buyer has to have a cash of ~6 lacs. 
2. The Buyer would go in for a loan of 34 lacs. 

A loan of 34 lacs @ 8.65% to be repaid in 15 Years requires the buyer to pay a EMI of 33,780(assume 34K). At the end of 15 Years, Buyer (now the house Owner) will have repaid 61 lacs (34 lacs towards his principal, 26.8 lacs towards Interest).  Calculation Source

Points to be Noted - 

3. The Buyer will pay 26.8 lacs towards Interest. 

Here I would like to highlight to the prospective Buyer that half of the Interest is paid during the first 5 Years of the Loan Tenure. In this case, The Prospective Buyer will pay 13.3 Lacs (2.9+2.8+2.7+2.5+2.4) towards interest in first 5 years out of 26 lacs. 

Now is where the Buyer has to play smart - Instead of Buying the house right away, he should stall his decision by 5 Years and Invest the Interest amount he will pay in these years in a good fund (Don't Worry, we are there to help you!) which yields 15% compounding return. So he should start saving 13.3 lacs/5 (Years) / 12 (Months) ie., 22,000 every month. Use the remaining portion of the EMI to move into a rented house in the same area. I'm sure you can easily get a 45 Lacs apartment @ 12K rent or even lesser than that (34K-22K).  

In 5 Years, the 22,000 prospective Buyer's monthly  investment will grow in to 19.2 lacs. Add to this the Initial Down payment, 6 lacs Invested likewise will be 12 lacs. Both the monthly SIP &  lump sum when invested in a fund yielding 15% returns over the 5 years will aggregate to INR 31 lakhs. Calculation Source

Alas! the price of your home will not be the same, It will raise too! So @ 7 % appreciation, the value of the same property will be 56 lacs. Good News is you already have 31 lacs and you need a loan of only 25 lacs and on top of that, You can easily afford to pay an EMI of 34K. Let me remind you, In 5 years' time, your earning will have improved too and you can afford to pay 25% extra hardly feeling a pinch. So in all you can pay a EMI of 34*125% = 42.5K.  You can now repay the loan of 25 lacs in 6.5 Years. The interest outgo will only be 8 lacs. 

Points to be noted - 

4. Buyer now pays only 8 lacs interest instead of 36 lacs (refer point 3), in the process saving himself 28 lacs! 
5. Buyer becomes the owner (forecloses the loan) in 11.5 Years instead of 15 Years initially expected, saving 3.5 Years of time. 

Since the Buyer (now the house owner) is smart he will continue to assume the loan is on going, will invest the EMI amount of 43K in  a good fund (again don't worry, we will guide you for sure). He will continue to save (invest) 43K monthly for 3.5 Years (time saved from Point 5). At the end of 3.5 Years, his corpus will be 23 Lacs. The home owner should set aside this corpus for his retirement and continue to hold for 20 years, the corpus will be 3.7 Crores. So if the Buyer plans properly, in 15 years, He can retire with a house to live & without any financial worries. 

On a personal note, I think it is very important that we all own a piece of roof we can call ours. If We have not started planning, We should start planning towards it right now. No good day to start than Today!

Notes - It is assumed that the Buyer invests in Balance fund which have given a average return of 16% in last 5 Years.

For any financial Planning queries, Please contact Droplet Advisory @861 017 2018/824 836 9621.

Caution - Mutual fund investements are subject to market risk. 

Comments

Post a Comment

Popular posts from this blog

Why Investing is Easy - Chapter#1

Image
 We have been planning to write a piece with this title for sometime now. It so happened that last week I was speaking to a good friend from Investing community and he shared a experiance with me. He chanced upon a Doctor and learnt that there are from the same place. So the conversation boiled down to - "What puts food on the plate question". So One was a doctor and another was a full time investor/advisor. The Doctor was quick to point out that - Being Investor is such a easy profession unlike others, One can easily make 30-50% returns every year. My investor friend would only laugh since he knows that he is the not 1st and he will not be last to "think" that investing is Easy.  But of course, Investing is easy. Let me put the facts out here.. Lets say this is Jan 2019 and you started simply started SIP of 10K in a Mutual Fund that invests only in Top 100 stocks or lets say just did a one time purchase of about 1 lac. Here is how the results will look today -  In
Read more

Interim Budget - 2024

Image
 We promised to bring you the Chapter#2 of the Why Investing is easy but in the interim, Government published the Interim Budget and I think its reasonable that our readers expect us to write about it and we write about it. So Chapter#2 can wait... Here's the News from the Interim Budget. “ If it ain't broke, don't fix it.” The Government has not done much mumbo-jumbo in the budget and there is hardly anything for middle class as such. Things look far better now than they were in the past and good thing is Government not trying to tinker things, that are working fine, just for the sake for some "Budget-drama".  Where does that leave us? If you have been reading our budget blogs , you will appreciate the fact that we always want to give a personal touch to what the take aways from the Budget!                                    Take Away# 1 Fix it if its Broken This is so much in contrary to what the Government has done with the Budget but gives a very important cu
Read more

Happy New Year 2024

Image
                      Happy New Year! This is the 7th New Year for Droplet Wealth and each year, we share the rules of personal finance but this year we wanted it to be a bit different. So we will tell you a real story about how one gentlemen turned 29 Crores into 5000 Crores and the financial lessons we can learn from it. The Story -   The Gentleman we are talking about was a Managing Director in a Luggage brand company and the bosses at the company moved on, gave the control to the second generation. The second generation was not keen to work with our MD. Our MD realized this soon and resigned from the company, purchased a 56% stake in its competitor for 29 Crores. Mind you, He had that much money to invest! Now he was his own boss and working in his own company, though his company had limited market share and was much smaller than his previous company. The slog went on for 12 years and today, his company has overtaken the company where is worked as MD and is valued at 10,000 Crore.
Read more