Home loans are the biggest enemies of software engineers.
What I am going to explain in this post might not go down well with people, especially software engineers who are struggling with home loan EMIs. I have been explaining this to friends using pen & paper, but thought of putting it down as a post today so that it might help many youngsters in the future to think twice before signing on the dotted lines.
If you are a working professional, and you want to know who your biggest enemy is, it is your “home loan”. Funny isn’t it? While some of your overjoyed colleagues are applying for bank loans to buy a house, which is considered an achievement, I am telling you that it is your biggest enemy.
The status symbol associated with owning a house even at the cost of incurring a loan, is one of the greatest inventions of bankers to keep you imprisoned for the rest of your life, to force you slog yourself forever into a well oiled machinery to keep their cash registers ringing.
Let me illustrate with a practical example. Suppose you are earning a gross salary of Rs 1 lakh per month and apply for a home loan, at 10.4% interest, you can get a loan of around Rs 58 lakh for 20 year tenure, with each monthly EMI of Rs 58,000.
You can use one of the several online tools like this to calculate it:
Since a bank can fund upto 80% of the home cost, it means the Rs 58 lakh you get from bank covers 80%, and the other Rs 12 lakh should be borne by you from your savings. It means, you can now search for a house costing Rs 70 lakh (This is the typical all inclusive cost of a decent 3 BHK apartment in a decent location in Bengaluru).
Now that you are surrendering yourself to this loan, for the next 20 years, you must slog, work late nights, work on weekend, lick your boss’ shoes and what not, because you cannot afford to miss that promotion (if you miss the promotion/payhike, then the inflation will overtake your salary and your standard of living goes down). And this can go to extreme levels during slowdown/recession because you must retain your job at any cost.
Ok, now comes the most interesting part. The system is such that for the first 5-6 years, your EMI would basically be mostly the simple interest on your loan amount. Which means, let’s say after 4 years, you say “Enough of this, now I want to move to another city or some onsite-job or I want to leave this job and start my own company etc”, you might decide to close your loan and approach your bank. Guess what? The bank would say “Ok Mister. You had taken a loan of Rs 58 lakh. Now, after 4 years if you want to close this loan, you must pay us Rs 54 lakh”.
Yes. Seriously!! It sounds funny but it is true. In those 4 years, you had paid a total of Rs 23 lakh as simple interest & Rs 4 lakh as principal amount repayment. In equivalent words, you can say that you paid Rs 23 lakh in 4 years or Rs 48K per month, just like rent. What a joke!!
(Some might say that the asset would have witnessed “great” appreciation, but that is only in the very long term. In the first 3-4 years, the best resale value you can get for your Rs 70 lakh house would be around Rs 75-77 only. i.e To get an appreciation of Rs 5-7 lakh, you had to shell out Rs 23 lakh in the form of simple interest)
So, if home loan is your enemy, what should you do for a shelter?
Ok, now let’s keep aside all the above calculations and come back to what you have in hand. Since you had savings of Rs 12 lakh (which you were ready to pay as initial downpayment), let’s assume that itself is your cash asset now. And since you were ready to pay Rs 58K as EMI, plan to split it into Rs 24K & Rs 34K. Now go and get a house for rent. You can get a very good 3 BHK house for rent in Bengaluru for that Rs 24K/month. Best part about it is that you can get one close to your office, thereby reducing fuel expenses, commuting time/stress. And when you change companies, you can shift to another rented house near the new office, and so on.
Coming back to your plan, what do you have now? Rs 12 lakhs cash in hand, and Rs 34K recurring fund per month (the other 24K is for rent). Invest this into a diversified portfolio of mutual funds, equities, SIP etc. Even if the overall return rate is just 20% per annum (It can be 50% during boom time), your Rs 12 lakh would have become 30 lakh, and your Rs 34K recurring fund, when invested in SIP would grow to Rs 35 lakh. Total = Rs 65 lakh.
(or Rs 76 lakh if the overall return rate is 25% per annum)
20% is a very conservative figure. There have been mutual funds giving upto 35% annual returns (CAGR) over 15 year period as well.
I had compiled such list here:
So, in just 5 years, by avoiding a home loan & choosing a rented house near your office, you would have accumulated Rs 65 lakh (or Rs 75 lakh) by 2020!! What do you want to do in 2020? Move to another city? No problem. You do not have to worry about selling a house before relocating to another city. You want to start your own company? No problem. You can dive into it because you don’t have this heavy commitment of EMIs to a banker. Recession time? Don’t worry. Even if your company goes bankrupt and you become unemployed for a few months, the banks will not be behind your back, and nor would you have to worry about defaulting (and the bank confiscating & auctioning your house), because, you don’t have a home loan.
In 2020, if you don’t want to do any of the above, but just buy a house, you will anyway have Rs 65 lakh (or Rs 75 lakh). Since Bengaluru is expanding in all directions, there is no dearth of land, and in 2020, you can still easily get a 3 BHK for Rs 70-75 lakh in an “upcoming” location. Or if you want in a better location, go for pre-launch project to avail better offer.
Live life bindaas. Don’t stifle your creativity, don’t create unnecessary stress and don’t imprison yourself for the rest of your life with a home loan.
Source – Internet
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