Housing Loans & EMI's Business

Introduction

Recently one of my Techie clients from the city of Bengaluru had moved into a new flat and something else was running in my mind when he took my assistance in filing his income tax return (ITR), a Young techie of around 34 years having a salary of around Rs 2 million per annum with a Valid deduction of Rs 497,500 leaving him with a Taxable salary of Rs 15,05,500 and a total Tax liability of Rs 273,780 leaving him with Take-home pay of Rs 12,28,720 which on an average will give him a Take-home pay of Rs 102,393 Per Month.

Understanding the EMI Business step by step

Now just imagine that he has taken a 2 or 3 bedroom house by outright Purchase /Buying it from a developer and let us assume that he has taken a loan of Rs 50 lakhs at various scenarios given below @7% Rate of interest on a floating basis as explained below, I have not added the Processing Fees which Differsfrom Bank to Bank

So if you dissect the EMI's its very much evident that housing loans tend to be on the higher side and actual return by way of rent  ( In case you let it on rent )will be anywhere between 5 % to 7 % of the total project cost / Apartment Cost, so according to my analysis buying a Home or Apartment in a Metropolitan city has to be considered cautiously or you should have a maximum exposure of 40 % of the total cost of the Home / Apartment as borrowings plan, else it does not make sense meaning 60 % should be your contribution and the balance 40 % as borrowings because in the same example if the techie has opted for 10 years repayment period he has to shell out a sum of Rs 58,054 on total take-home pay of Rs 102,393 leaving him with a cash of Rs 44,339 giving him a hand to mouth living despite earning Rs 2 Million Per Annum.

Practical Suggestion

Accumulate as much cash as possible and after reaching your targeted amount buy or construct the same in an affordable place like tier 2 or Tier 3 cities where the land cost is comparatively less and you get a bigger size apartment of land and eventually you can construct a bigger house of your liking. I have seen my relative's homes in Metropolitan cities, though they mention it as a 3 bedroom house when I see the dimensions Practically I can say that their homes are a glorified 2 BHK Homes because the area as mentioned as carpet area, super built-up area and the built-up area gets lost in implementation but you will have to pay the service charges on the total area which tends to be a higher figure, please consider this point along with certain restrictions put up by the building societies.

Conclusion

I have also undergone the same process in my 30's and then the housing loan was at a peak rate of almost 12 % as I felt personally, that once you take a housing loan from any bank or NBFC then you are stuck with the whims and fancies of your lender&is a case very similar to a monkey caught with a hand in the jar, you cannot pull your hand out as you are trapped with a loan, the hikes in the interest rates are steep and immediate by the issuance of a simple notice to the borrower and downward trendis not at all passed on to the customers, even if they are passed it will be a small fraction of percentage, having said that Home loans will survive because of the huge sentimental value attached to a home and owning a car in India. My personal suggestion is to buy from your own resources by accumulating the money and not by paying EMI's because once you get accustomed to paying EMI's you are caught in the vicious circle of the Banks and NBFC's.

Take care of your own hard-earned money.