People usually seek to invest in assets like property and gold. However, the former makes for a considerable investment while gold is something that can be bought in several installments. Now buying property usually entails taking a home loan. People take home loans since there are tax benefits on both principal and interest repayments through the EMIs and also because homes are assets which appreciate in value.
An asset is usually regarded as something which ensures consistent cash flows for people. However, a home truly becomes an asset once it is given out on rent. In case the property that has been bought is being constructed, the home loan has to be borne entirely. However, homes do witness value appreciation and for example, a home that was once purchased for a sum of Rs. 20 lakhs may be worth almost twice the money in just 5-10 years. However, you should work out the amount that you have paid off as interest on the home loan.
Additionally, not paying the EMI on your home loan for 3 months will lead to the bank or NBFC taking over the home and hence it cannot fully be called an asset until the home loan is cleared. You should only take a home loan in the following cases:
- The monthly home loan EMI should be lower than 30% of the monthly salary that you earn.
- The ratio of the cost of renting a property to the cost of purchasing a property is lower than 15.
For example, if a home is priced at Rs. 50 lakhs but the monthly rent for the same is Rs. 15, 000, i.e. Rs. 1, 80, 000 annually, this ratio is a little less than 28. This indicates that you should sensibly rent the home instead of purchasing the same as an emotional investment decision. However, if you have found your perfect house that you simply have to snap up and have already taken a home loan for the same, there are ways that you can actually profit from the loan in question.
Suppose you are willing to repay your home loan of Rs. 70 lakhs for a tenor of 20 years with a monthly EMI amount of approximately Rs. 60, 000. The rate of interest can be around 8.35%. You should seek out the highest loan tenor since you will have to lower the monthly EMI. You should try for a loan tenor of 30 years and this will help you slash the EMI every month to around Rs. 52-53, 000 on an average.
The extra amount that you save can be invested in SIPs or mutual funds for a similar period of time. If you take 15-18% as an annual growth rate, the sum of money that you accumulate for this period will be more than what you pay as interest on the home loan during this period. The profit that you earn will be a handsome sum of money that could be a major backbone for you in the future.