Home Loan – An investment in the long run

There is no contradicting the fact that home loans have proved to be game changers, or should we say, life-changers for home buyers. Had it not been for the easy availability of home loans, many among us, especially the working class, would not have even been able to afford a home. There are so many who believe that property prices have become unduly high because of home loans. The origin of the phrase ‘shooting through the roof’ only corroborates the fact the value of homes have appreciated beyond belief. It will not be an exaggeration to say that investing in a home earns better returns than any other class of long-term investment options.

For the sake of discussion, let’s take an example: Suppose you take a housing loan of Rs. 50 lac. The loan is available for, say, 9%, based on your home loan eligibility, which is primarily dependent on the income and repayment capacity of the borrower. There are other factors that determine the eligibility of home loans, such as age, financial position, credit history, credit score, other financial obligations etc. but that is a different issue altogether. So, continuing with our example, you have the option to decide the tenure between 10 and 30 years. If you choose a shorter tenure, your EMI is higher, but you pay lesser towards the absolute interest cost. Conversely, for a longer tenure, your EMI is smaller but your payment towards interest is more.

Whatever be the tenure, you cannot take away from the advantage of a forced savings through the EMIs which is being ploughed to create a fixed asset for yourself. What’s more, if you are paying EMI for the housing loan, it has two components – interest payment and principal repayment. The interest portion of the EMI paid for the year can be claimed as a deduction from your total income.

The rates and trends of residential and commercial property prices in major cities of India suggest that property appreciation can vary Q-o-Q from 1% to 11%, particularly in Mumbai. So, even if you pay, say, Rs. 75-80 lac for a Rs. 50 lac loan over a tenure of 10 years, your property price at an appreciation rate of even 1% (Q-on-Q) has nearly doubled in the same period.

Additionally, if you let out your property (assuming it is your second home), the rent earned can be a second stream of income, which makes repayment of your housing loan easier.

To sum up, a good investment is something that will pay you more than you paid for it. An asset is anything that puts money into your pocket. Investing in a home does just that with the convenience of a home loan.