For most Indians having a house is the first investment that they ever make. Even the government gives subsidies for taking your first house. The first house is an emotional issue for most middle class Indians.
After getting a job an Indian male is expected to work for the next 2 to 3 years and then get married. After marriage husband and wife want that they have a house of their own as their first investment where they can live on their own.
So after the person has started working and for 3 years has saved something he gets married spends his savings immediately for expenditures after marriage. Then he starts saving for a house and takes a loan to buy his first house.
Now the company giving the loan is more than happy to give him a longer duration loan because they also realise that compounding helps them make more money.
While paying for the instalments the husband and wife end up completely blocking their liquidity for the next few years.
As time passes you have the family growing and the investments never happen.
Suddenly at the age of 45-50 the couple realise that they will retire in the next 10-15 years. Life has just passed them by.
I did the same thing incidentally, so I know what this couple goes through.
The house I bought by investing Rs 200000 and taking a loan for the remaining 1900000, costed me over the next 15 years a total of rupees 3700000/- and the hardships that we had to undergo because of not having spare cash.
If I take out the benefit of tax that the government of India gives, I ended up paying a total of rupees 3300000/-. Today the value of the house is about Rs6000000/- so net gain of Rs2700000/-.
If I had invested the same monthly instalments in equity over the next 15 years (less the rent I was paying and less the tax benefit I got) I would still have invested every year about Rs150000/-.
The 200000 plus the 150000/- every year for the next 15 years in the conservative NIFTY index would have resulted in me getting approximately Rs100,00,000/-. At this point I could have bought the same house on cash and still have 4000000/- to spare or I could have bought a much bigger flat.
Now there is always this issue about staying in a rented house versus buying your own house… If you can manage to stay up in a rented house for a longer time and if the rent is controlled then you can hold back the fixed cash flow that you will have to shell out when you take a loan for your house. The rent also gets the income tax benefit.
Some of you may come back to me saying – the house also appreciates…. That’s true but the appreciation of any property even in a place like Bombay has not been more than 10 to 12% compounded over the last 35-40 years…. An investment at 15% will beat the appreciation of the property anyway… The second and more important point is, if the house is where you are going to stay then its appreciation has no significance because you will not sell the house in which you are staying and live somewhere else.
Now my intention of the headline is not to stop people from buying a house in which they should live… but the appreciation of the house and the interest rate that the loan company charges actually kill the capability of the couple to ever create wealth.
You should buy the house where you take a loan such that the interest payments get both the husband and wife a tax benefit and therefore the cash outflow is low. You should first invest and create a corpus which appreciates more than the value of property and from that corpus take out enough money and do a down payment so that the interest outflow is just enough for qualifying for a tax rebate.
Till next time….