There are two types of homes:
Primary Home - When you really have need a house for living
Secondary - When you are looking for an profit in coming future.
Primary Purchase can be for:
1) Home loans are available very easily and the rate of interest is also competitive compared to other loans.
2) Tax benefits are available for the payment of principal and for interest.
3) People also let it out and earn rental income which reduces the burden of the EMI payment.
People take home loans for a term of 20 years and above.This gives them maximum loans and the EMI comes within their repayment capacity.However,when you purchase the second home with the objective of making an investment,then you must know the impact of a home loan interest on the same.
Housing loan is a debt and you should be very careful before taking it.Everyone knows that in the initial years the interest part is more and the principal is very less.Still,people plan to repay the loan within five to seven years.
Most of the borrowers do not understand the impact of interest payment and apply for a loan.I have seen many of our clients having their investment at 8% in FDs (fixed deposits ) and postal schemes and still going for home loans at 11%.We advise our clients to redeem such investment and repay the higher interest loans and create surplus for investment for future goals.If you are a buying a dream home for your genuine need,you can still go in for a loan and plan accordingly.However,if you are buying a home for investment purposes,then you should understand the impact of interest on it.For instance,Hiren Shah bought a flat worth Rs 70 lakhs.He took a home loan of Rs 50 lakhs to fund a new home for 20 years.The EMI was Rs 53,321 with the interest rate at 11.50%.The total yearly EMI was Rs 6,39,852.The interest outgoing was Rs 5,71,470 in the first year which was around 89% of the total EMI.At this rate,by the fifth year,the interest component will be above 85% of the total EMI.If the upward trend continues and five years later,the value of the flat becomes double,i.e.1.4 crore,it then seems that his investment has doubled in five years,giving an annualised return of around 15%.However,this is incorrect,since his cost of home has gone up from 70 lakhs to 97.64 lakhs as he has already paid an interest of Rs 27.64 lakhs in five years.
The investment returns after considering interest payments on the home loan,will be around 9% only.Further,he has to pay a long term capital gain tax on it.Income tax will further reduce his return on investment.One can also argue that a flat can be given on rent and the interest can also be set off against this income.Yes,you can do this but the fact is at present,the rental income is merely 3% of the investment and it will not set off the entire interest part.Dont forget to take into account the rise in home loan interest rates which may go upto to 13% and can also affect you badly.This is the case when there is appreciation but what will happen when the real estate market will correct or will remain stable for the next three to five years.
Real estate is also an asset class which runs in cycles and what goes up comes down.People have forgotten the crash of the real estate market in 1993.Real estate investment also has legal complications besides other charges like brokerages,stamp duty,registration and transfer fees.This market is also not well-regulated like the equity market and still people feel comfortable in investing in real estate.People forget to balance between the different asset classes and ignore asset allocation,which is the basis of any investment.
Primary Home - When you really have need a house for living
Secondary - When you are looking for an profit in coming future.
Primary Purchase can be for:
1) Home loans are available very easily and the rate of interest is also competitive compared to other loans.
2) Tax benefits are available for the payment of principal and for interest.
3) People also let it out and earn rental income which reduces the burden of the EMI payment.
People take home loans for a term of 20 years and above.This gives them maximum loans and the EMI comes within their repayment capacity.However,when you purchase the second home with the objective of making an investment,then you must know the impact of a home loan interest on the same.
Housing loan is a debt and you should be very careful before taking it.Everyone knows that in the initial years the interest part is more and the principal is very less.Still,people plan to repay the loan within five to seven years.
Most of the borrowers do not understand the impact of interest payment and apply for a loan.I have seen many of our clients having their investment at 8% in FDs (fixed deposits ) and postal schemes and still going for home loans at 11%.We advise our clients to redeem such investment and repay the higher interest loans and create surplus for investment for future goals.If you are a buying a dream home for your genuine need,you can still go in for a loan and plan accordingly.However,if you are buying a home for investment purposes,then you should understand the impact of interest on it.For instance,Hiren Shah bought a flat worth Rs 70 lakhs.He took a home loan of Rs 50 lakhs to fund a new home for 20 years.The EMI was Rs 53,321 with the interest rate at 11.50%.The total yearly EMI was Rs 6,39,852.The interest outgoing was Rs 5,71,470 in the first year which was around 89% of the total EMI.At this rate,by the fifth year,the interest component will be above 85% of the total EMI.If the upward trend continues and five years later,the value of the flat becomes double,i.e.1.4 crore,it then seems that his investment has doubled in five years,giving an annualised return of around 15%.However,this is incorrect,since his cost of home has gone up from 70 lakhs to 97.64 lakhs as he has already paid an interest of Rs 27.64 lakhs in five years.
The investment returns after considering interest payments on the home loan,will be around 9% only.Further,he has to pay a long term capital gain tax on it.Income tax will further reduce his return on investment.One can also argue that a flat can be given on rent and the interest can also be set off against this income.Yes,you can do this but the fact is at present,the rental income is merely 3% of the investment and it will not set off the entire interest part.Dont forget to take into account the rise in home loan interest rates which may go upto to 13% and can also affect you badly.This is the case when there is appreciation but what will happen when the real estate market will correct or will remain stable for the next three to five years.
Real estate is also an asset class which runs in cycles and what goes up comes down.People have forgotten the crash of the real estate market in 1993.Real estate investment also has legal complications besides other charges like brokerages,stamp duty,registration and transfer fees.This market is also not well-regulated like the equity market and still people feel comfortable in investing in real estate.People forget to balance between the different asset classes and ignore asset allocation,which is the basis of any investment.
