Home Loan Opportunity/Real Cost

#1
Hi All,

I was trying to calculate the actual cost of a HOME LOAN and buying a flat. The points I included are:-

Interest outgo of loan
Tax saved
Monthly rent saved

Property/municipal tax paid each year
Society maintenance Charges
Maintenance cost of flat (painting, repairs etc)
FD interest lost as the hard cash is used for the down-payment.

In current situation with current rates of Home Loan Interest = 10.5% and FD rates (long term) 9.5% it makes no sense to buy an apartment.

I Have Excel sheet for the same. How to attach it here?
 
#3
Hi All,

I was trying to calculate the actual cost of a HOME LOAN and buying a flat. The points I included are:-

Interest outgo of loan
Tax saved
Monthly rent saved

Property/municipal tax paid each year
Society maintenance Charges
Maintenance cost of flat (painting, repairs etc)
FD interest lost as the hard cash is used for the down-payment.

In current situation with current rates of Home Loan Interest = 10.5% and FD rates (long term) 9.5% it makes no sense to buy an apartment.

I Have Excel sheet for the same. How to attach it here?
Please attach the excel file according Alchemistji suggest. It will be very useful to me.

Thanks.
 
#5
How about Home+FD partially

FD interest lost as the hard cash is used for the down-payment.

In current situation with current rates of Home Loan Interest = 10.5% and FD rates (long term) 9.5% it makes no sense to buy an apartment.
Yes, Even I would like to see your calculations. It really depends on how you want to utilize your hard cash. I am not an expert, it's just open for discussion.

Let me start with a simple calculation -

Let's say you have Hard cash 45 Lacs (ready to accoupy properly value). There is no reason we have to invest entire 45Lacs to buy it.

For calculation purpose, say you are

#1. Taking House loan of 30 Lacs, 11% fixed interest for 7 Yrs (HDFC is providing TrueFixed loan). By end of 7 Yrs you will be paying approx 43 Lacs to Bank, which is 13 Lacs more.
#2. Investing on FD same 30Lacs @ 9.5% for 7Yrs will give you 56 Lacs. Having max 30% tax slab, This will reduce to 45.5Lacs, which is 15.5 Lacs

So what ever paid extra to bank on loan is recovered back. Inflation is applicable for #1 and #2 above, So will it get nullified?

Next important questions are

#3. Are you renting this apartment?

3.a. If yes, you get tax benefit of full interest paid amount on home loan. For above calculation its 4 Lacs for 7Yrs.
3.b. And also Rent received say 14K PM, after tax (30% slab) will give 8 Lacs for 7Yrs.
#4. If you are staying in rented home in a different city, 3.b gets nullified, but You can claim HRA for 14K PM paid - For salaried people, benefit of couple lacs.

Now, let's look at the first 15Lacs (45-30Lacs) down payment. If this is not invested in an apartment, this amount in FD will give you 22 Lacs after tax at the end of 7Yrs. This has to be reduced with benefits pointed out above (#3.a plus #3.b plus #2 minus #1)

So at the end of 7yrs owning a house (value >45Lacs), staying in rented one and also enjoying hard cash (30Lacs in FD) may be much beneficial??

I would have missed lot of other points like maintenance cost loss etc. What are the other important high value points I missed in this?
 

Alchemist

Administrator
Staff member
#6
I would have missed lot of other points like maintenance cost loss etc. What are the other important high value points I missed in this?
The most important point is where real estate prices are headed in your area/city.

If the prices of apartments in your area/city are going to increase 15% in a year, it makes sense to buy the apartment even without considering other benefits like rent saved (or rent earned).

See the link that Sarav has posted.

The real rates in the economy are around 0.

For many, especially in the higher tax brackets, the real rates are negative.

That's the reason why so much money is flowing into hard assets like gold and real estate.

The money supply in the economy is exploding. Interest rates in India aren't high enough to control this exploding money supply.

Even though growth of money supply has slowed down in recent quarters, it is still high.

India's M3 money supply rose an annual 13.9 percent in two weeks to August 10, compared with a 13.5 percent rise two weeks ago and a 17.5 percent growth a year earlier, the Reserve Bank of India said on Wednesday.
India's Aug 10 money supply grows 13.9 pct y-o-y - RBI | Reuters

A borrower gains and a saver loses in an economy with negative real rates.
 
#7
Can someone please explain what does Alchemist mean by " real rates in the economy " ? Are we talking about real growth rate of economy or inflation minus savings rate?

Thanks
 

Alchemist

Administrator
Staff member
#8
Can someone please explain what does Alchemist mean by " real rates in the economy " ? Are we talking about real growth rate of economy or inflation minus savings rate?
Real interest rate = Nominal interest rate - Rate of inflation.

If you put Rs 100 in a 1-year bank deposit with 10% interest, you will get total Rs 110 after 1 year.

If the inflation rate is 10%, you Rs 110 will have the same value that Rs 100 had 1 year back.

If inflation rate is higher than 10%, your Rs 110 will have less value compared to value that Rs 100 had 1 year back. In such a case, you will lose value by investing in a fixed deposit.

If you are in the 30% tax bracket, you will only get Rs 107 after one year and your real return will be even lower.

To get real appreciation in value, you need to invest in an asset which gives you a post-tax return that is greater than the inflation in the economy.
 
#9
From those discussion, what can we think of ? Investing in house with the hand on cash or with house loan?

In my case, I would like to build a house for my living, not for any rent. which will be the best option ? Building with the cash or with Housing loan?

P.S: If it's with housing loan, then the money will be in fixed deposit and not with any higher interest paying instrument.
 

Atiker

Active member
#10
From those discussion, what can we think of ? Investing in house with the hand on cash or with house loan?

In my case, I would like to build a house for my living, not for any rent. which will be the best option ? Building with the cash or with Housing loan?

P.S: If it's with housing loan, then the money will be in fixed deposit and not with any higher interest paying instrument.
Take a home loan as over draft.

This gives you good liquidity during the whole tenure of the loan. If you find good opportunity where you can make more than the interest you pay for over draft, simple withdraw the amount and invest in that good opportunity.

Catch is that overdraft is always on floating rate, so you will never get a fixed deposit higher than your overdraft interest.

Another catch - overdraft loan is always higher than normal floating rate home loan from the same firm.
 
Last edited:

Atiker

Active member
#11
P.S: If it's with housing loan, then the money will be in fixed deposit and not with any higher interest paying instrument.
If your housing loan is fixed at X% interest and you have an FD at Y%.

Then if X=Y you won't make any money.

Even if you get tax advantage in housing loan that will be eaten up by the extra tax that you need to pay for the interest on FD.

else If Y>X

I don't think you can find an FD which gives interest more than prevailing housing rate interest. If you can get an FD rate much higher than loan rate , all power to you :).

X>Y is stupidity.

Investing in FD at rate lesser than what you pay for home loan is sheer stupidity :).
 
#12
Investing in FD at rate lesser than what you pay for home loan is sheer stupidity :).
I guess your theory holds good only for first year. You are missing the concept of increasing compound in FD compared to home loans decreasing principle.

It's very simple - pull out a FD calculator and check the maturity amount for 20 years. Compare it with Home loan calculator for same 20 years with 4% to 5% higher interest rate than FD.
You will be amazed to see the amount difference.
 
#13
I guess your theory holds good only for first year. You are missing the concept of increasing compound in FD compared to home loans decreasing principle.

It's very simple - pull out a FD calculator and check the maturity amount for 20 years. Compare it with Home loan calculator for same 20 years with 4% to 5% higher interest rate than FD.
You will be amazed to see the amount difference.
Yes there will be significant difference. But you are missing important thing that you are paying EMI. If you pay the entire loan after 20 years then you will find that the amount paid in home loan will be much more than FD maturity amount.

Secondly on loan amount, there is monthly compounding, whereas in FD there is quarterly compounding. So even if interest rate are same, you end up paying more in home loan

Third, for self occupied property, the maximum exemption is 1.5 lakhs or 2.5 lakhs. Also you will get income tax rebate only after the property is ready to move. I know you can claim tax rebate of under construction period after the construction is complete, but delayed rebate also adds to the cost.

Fourth, there are many charges on home loan, processing fess, mortgage charges, valuation charges. Bank may also force you to get property insurance or life insurance.

In summary, if you can afford to pay from your pocket, it is advisable not to go for home loan.
 
#14
In summary, if you can afford to pay from your pocket, it is advisable not to go for home loan.
This is wrong. I would say, If you can afford to pay from your pocket, you should go for home loan.(This is what business men do. They never use their own money. They always go for different type of loans incs IPOs). Looks like i wont agree to what you are saying and you wont agree to what i say. So instead of putting it in english words, lets do mathematical calculation.

For example home loan on 50Lacs, 20yrs, rate of interest in FD and Home loan changes. For simple calculations lets take interest in home loan as 10.5% and interest in FD as 5.5%(reducing tax and other unknown factors).

Total amount paid to bank at the end of 20yrs at 10.5% - EMI(principle+interest) = Rs.1,19,80,559/-
Total amount recieved thru FD at the end of 20yrs for 5.5% on quaterly compounding = Rs.1,35,07,424/-

Do you think the calculated numbers and examples assumed are reasonable and right?

If we include your third point, the benefit of taking home loan will further increase - but very little. For let out home its much higher.

There is nothing called force as per your fourth point. Bank is going to see how desperate you are, especially pvt banks.
 
#15
For example home loan on 50Lacs, 20yrs, rate of interest in FD and Home loan changes. For simple calculations lets take interest in home loan as 10.5% and interest in FD as 5.5%(reducing tax and other unknown factors).

Total amount paid to bank at the end of 20yrs at 10.5% - EMI(principle+interest) = Rs.1,19,80,559/-
Total amount recieved thru FD at the end of 20yrs for 5.5% on quaterly compounding = Rs.1,35,07,424/-

Do you think the calculated numbers and examples assumed are reasonable and right?
No, your calculations are not right.

Let's say today you have 50 Lakhs with you. That's the net total money you have.

Case 1: You are putting the 50 Lakhs in FD & 5.5%. At end of 20 years, you will have 14,908,686.48. Roughly one and half crore.
You are also paying Rs. 50000 per month as EMI on your loan.
At the end of 20 years, you have 1.5 crore rupees and a house.

Case 2: You are buying the house with 50 Lakh cash, no loan.
You are not paying 50000Rs per month on EMI, so instead you put that in a recurring deposit every month at 5.5% interest.
At the end of 20 years, you have 21,817,126 from your recurring deposit - i.e. around 2.1 crores and a house.

You loan bank money at X% (which is what a FD is).
Bank loans you money at Y%.

If Y > X even by 0.01% you will not come out ahead. This is basic math.
 

Atiker

Active member
#17
For example home loan on 50Lacs, 20yrs, rate of interest in FD and Home loan changes. For simple calculations lets take interest in home loan as 10.5% and interest in FD as 5.5%(reducing tax and other unknown factors).

Total amount paid to bank at the end of 20yrs at 10.5% - EMI(principle+interest) = Rs.1,19,80,559/-
Total amount recieved thru FD at the end of 20yrs for 5.5% on quaterly compounding = Rs.1,35,07,424/-
No Sir, that incorrect,there is a serious flaw. Can you find the flaw in the above reasoning and calculation ? All power to you, once you get it.

Basic math - If bank owes you money at 10% and you make an fd in the same bank at a percent less than 10% say 9.9%, who will be at a loss ?
 
Last edited:

Atiker

Active member
#18
Really ? Can you find the flaw in the above reasoning and calculation ? All power to you, once you get it.
Assume you have zero money and bank gives you 50 lacs for an emi @ 10.5 % for 20 years. The monthly emi comes at 49919.

Now you get ideas and instead of buying a house you put it in an attractive FD.

Assume you are lucky to get a FD with monthly compounding and added flexibility of withdrawing the interest earned every month. The earned interest for the first month will be - 22917 (@ 5.5 %). Alas that is not sufficient to pay the emi due for that month, so you need to chip in the remaining amount thats a princely 27 thousand.

You are losing 27 thousand per month :(
 
Top