As everyone knows the availablity of home loans in India has propelled the market to new highs in 2007, sometimes upto 300% in 3 years. Most homes are unaffordable to the average Indian who is somehow supposed to magically generate money out of think air. Indian loan rates are double that of the US so the average interest payment on a loan is more twice of an average US loan. Someone suggested in one of the comments on how one can double money in 3 years by buying a property. Lets analyse this myth and see if the investor doubles this money or just goes bankrupt.
Property value total including registration : 1,00,00,000 (1cr)
downpayment : 15L
loan amount: : 85L
interest rate: : 10%
loan period : 20 years
EMI : 82026.84
payment towards interest 1st year : 8.4L
toal payment towards interest after 2nd year : 16.7L
total payment towards interest after 3rd yar : 24.8L
total principal paid in 3 years : 3.5 L
Total equity in house : 15 + 3.5L = 18.5L
Loan early termination fee 1% of oustanding principal : 1% of 80L = 80k
After 3 years the property has to sell for atleast (1.25 +80k ) = ~1.26 crore to break
Lets tabulate the gains based on the projected returns.
increase = -20% gain = -46%
increase = -10% gain = -36%
increase = 0% gain = -24%
increase = 26% gain = 0%
increase = 50% gain = +129%
increase = 100% gain = +400%
All we can say is that leverage is a high risk, high reward game. If you have the guts to lose 50% of capital or 46L in 3 years, you can make anything from 129% to 400% in that same period.
All the best to the risk takers. You deserve the reward as it is commensurate to the risk.
The above example is more relevant for an leveraged investor. Let us now think from the point of view of the renter. If the annual rent is 3.6L, over 3 years the renter pays approx 11L for 3 years. It makes sense for the renter to buy an apt for a price where EMI is closer to rent, rather then further way. Its more common sense then any complex math
Lets do the same calculations for a 60L apt with a rent of 20k
price 60L
downpayment 15L
loan 45L
tenure 20 years
interest rate 10%
EMI 43400
total interest over 3 years : 13.1L
total principal paid : 2.4L
total equity : 17.4L
total rent paid over 3 years : 7L
here a 3 year rent payment leaves only 5L as a difference over 3 years over the interest paid.
