08/22/2017
 

Why I Am Not Buying an Apartment Part 2 – The Home Loan Trap

Notwithstanding all the arguments put forward in the previous part, the single biggest reason why I am not buying an apartment in Bangalore (or anywhere else) is because I don’t have the money to pay for it. “But who has that kind of money? You can take a home loan no?” they will say. No. I am not interested in becoming a slave to the system by falling into the biggest financial trap the modern World has devised. Thanks to hyper-inflated property prices, it is simply not possible for the “aam aadmi” to own a house without sticking his neck out and making a deal with the devil, signing away his entire life for a concrete box in the sky – Yes, taking a Housing Loan or Home Loan or Mortgage. As @clemenza famously said,

[bkinfobox backgroundcolor=”#ffff88″]”A home loan is an agreement between you and the bank that you will work for the rest of your life to pay them money”.[/bkinfobox]

Home Loans, Slavery and the Middle Class Trap

After humanity got wise and banned slavery, shrewd people managed to invent other avenues of more “polished” forms of slavery to keep the revenue flowing. The “Banking-Home Loan industry” is one of those. As we speak, those who profit from this scheme are lounging at their well-appointed Mahogany desks in corner offices on the 20th floor, dressed in crisp Italian suits and evilly chuckling away thinking about all the money being raked in by their bonded laborers, the house owners who toil away their life and blood to fill their coffers with the money they spend a substantial part of their life earning. People these days seemingly work for 20 long years for only one goal: To make sure there is money in their account on the 7th of every month. Every single movement and decision taken by them in life seems to be dictated by their home loan. Not really a way to live a life, I would say.

The middle class including all its subclasses are often the biggest victims of the home loan industry. It capitalizes on the impatience and ambition of the middle class to move “up” in life, which they (falsely) believe can be done by acquiring untenable assets like cars and apartments. In reality, this not only prevents them from actually “moving up” in life but also ensures that they get stuck in the vortex of middle class-ism forever. The upper class is upper class because they are rich. That is, they have in hand tankers full of liquid cash or assets which can easily be converted into hard cash at a short notice. Middle class households do not have this. But what they have is one home loan, one car loan, one/two personal loans and four or five credit cards, making them live on revolving credit which really does not lead anyone anywhere in life. Once you buy an apartment off a full loan, that is mostly how far you would be getting in life.

No one can ever get rich if they are trapped in the loan bubble because any loan or any credit product is designed to shear the purchaser off their wealth by making them pay double of what they signed up for. By the time you finish paying up your home loan, you would have ended up paying almost or more than twice the amount you started off with. If you buy an apartment for Rs.40 Lakhs at 10% interest for 20 years, you would have paid around 90 Lakhs by the time your loan gets over. And for the first 10 years, you would be paying only interest! In case you would want to foreclose your loan before the first x years, you would have to pay almost the entire loan amount even after paying many EMIs! This is true for all types of loan. Imagine, your entire life, atleast the good part of it from when you are 30 to 50 will be slaved away to pay off a home loan. It this what your life is for?

Some Money Matters – Is it worth investing in an apartment?

Yes, real estate is a big investment vehicle. Yes, there are lots of people who make lots of money out of it. But the difference is that those people already have lots of extra Indian Rupees lying around to roll. The average Joe who sees this and jumps into the fray will end up earning nothing. Yes, apartment prices appreciate greatly. But what people fail to take into consideration is how inflation affects prices of apartments. It makes sense if you had bought a flat with extra cash and then sold it off for gains, but when you buy an apartment on loan, selling it even at double of what you bought it for will not net you any gains thanks to interest and inflation. This is what the poor sods who scrape the barrel to purchase a roof and then try to “make money” by selling it later fail to realize. Real Estate gambling is meant for the Sharks. The squirrel will suffer consequences if it tries to open its mouth as wide as seeing the elephant do it.

Real Estate Case Study: Mr.Sasi sells his apartment and doubles his money.

Mr.Sasi bought an apartment 4 years ago for 30 Lakhs on loan at Bellandur Outer Ring Road, Bangalore. He sells it today for 60 Lakhs! Let us assume that Mr. Sasi went abroad and made some solid cash in commissions to pay off and settle his home loan. Even though it might sound fantastic that he doubled his money in four years, it is not so. There are no substantial gains made because there are some things we fail to take into consideration. What will Mr. Sasi do with the Rs.60 Lakhs he has now? For starters, he has to find a new place to live in.

  1. Prices for everything else has also doubled in those four years thanks to inflation. All flats around the same area cost more or less the same 60 L today. The nearest place where Mr.Sasi can get an apartment for Rs.30 Lakhs today is at Ramamurthy Nagar, 10 kilometers farther away on the Ring Road.
  2. The 60 Lakhs he has in hand has somewhat the same value what 30 Lakhs had 4 years ago. In reality, he has not gained anything. He also has not lost anything. Or has he?
  3. Mr. Sasi has paid Home Loan EMIs for 4 years. At 11% interest on Rs.30 Lakh it would make around Rs. 30,000 pm or Rs.14 Lakhs in 4 years. Which is only a part of the Interest on the loan and which has gone waste.
  4. If you look beyond the “Cash in hand”, you can see that minus the mortgage payments he actually has earned only 46 Lakhs, which is today not even worth the 30 Lakh he started out with four years back.

Now Mr. Sasi’s options are:

  1. Buy an apartment in Ramamurthy Nagar and spend two additional hours commuting every day, but at the same time having 30 Lakhs extra in the bank.
  2. Buy another apartment around the same Bellandur ORR area – Which makes no sense
  3. Move into a rented house around the same Bellandur ORR area and invest the 60 Lakhs elsewhere – Financially the best option.

So in the end, Mr.Sasi is left with nothing better even after getting double his investment back! And if he had used his gains from the sale of his apartment to settle the home loan, he would have been left with almost nothing. And we are not even taking into account his (wasted) effort and toil he endured in paying EMIs for four years.

But so many “common” people buy apartments, sell them and make money no? Yes, they do. And anyone can do that by following a few pointers. And it has a catch.

Financial Options and Advice on Buying an Apartment

Ask any financial expert or even the banks, and they will tell you that your monthly commitment payments (loans, rent) of all types put together should never exceed 30% of your total monthly income. Very true, but my experiences have taught me that it actually should be not more than one-fifth or 20% of your income. 30% should be put aside as investment and rest could be spent as disposable income. So if you earn one lakh monthly income, you should not pay more than 20,000 as rent or EMI of all types put together. And taking a leaf out of the “Don’t pay rent, pay EMI” people’s books, a most basic rule about buying apartments on EMI can be framed as follows:

[bkinfobox title=”Do not pay as EMI more than what you would pay as Rent” backgroundcolor=”#ffff88″ ]

Based on this rule, we can put forward some more pointers.

  • Fix your apartment buying budget at Rs. <50% of your monthly salary x 100>
  • Take a home loan whose EMI will not exceed 20% of your monthly salary
  • And of course, you MUST have the remaining amount (80%) with you for payment in cash to the builder!

[/bkinfobox][bkinfobox backgroundcolor=”#ffc4c4″]Do not go in for buying a house if you don’t have hard cash to fund 60% of the cost by yourself. The remaining 40% of the fund can be funded by a home loan. Otherwise, home loans will only lead to financial unsustainabiliy.[/bkinfobox]

For example, consider a household that earns Rs.1,00,000 a month. Their budget should be for an apartment whose cost does not exceed Rs.50 Lakhs. Their home loan EMI should not exceed Rs.20,000 per month, which means the home loan should be for Rs.20 Lakhs thereabouts. Which says that they should go about buying a house only if they have Rs.30 Lakhs or 60% of the apartment cost at their immediate disposal. This makes sense in the immediate and long-term, when returns will flow in on the incumbanceless 60%.

What if I don’t have any money with me?

Tough Luck. But hey, Dasa, there is a time for everything. Maybe it will come your way one day, or you could work towards accumulating that required money. Some ideas are: Sell Gold, your or your wife’s share, do a stint abroad (the most popular option), win the lottery, find an alternate source of income like brokering, start/partner a business, get mentioned in the will of a rich uncle and so on. Until then, stay put, like I do. There are millions of people who happily pump in their cash into apartments for the guts and glory of living in their “own” house. Maybe they all do have the money. I do not, so I am not buying an apartment. Maybe I am insane as a good friend pointed out. I earn the meager amounts I do after a lot of hardship and struggle, which I am not interested in giving away for some fatcat banker to buy his next Ferrari.

Now that we have got the finances out of the way, more detailed rationale will follow in the next part.

Alpine Eco Apartments at Doddanekkundi, Karthik Nagar, Bangalore

Why I am Not Buying a House (Apartment) Part 1 – Leave Me Alone!

Why I am Not Buying a House (Apartment) Part 3: Peace Out!

  • Only way to get cheap home for the ordinary man is to get property deal like he got from DLF

    • ‘He’ is no ordinary man…

  • Pingback: Why I Am Not Buying a House (Apartment) – Part 3 | Vadakkus!()

  • Pingback: Why I Am Not Buying a House (Apartment) Part 1 | Vadakkus!()

  • Himanshu

    Very well said…..and very useful for a person who is earning near about half lakh and dreaming to own an apartment…..

  • Reddy

    Hey I think you are also missing the point that getting decent apartment on Rent is Bangalore is becoming a challenge. You won’t even get a 2BHK for the 15k you have mentioned in areas like C V Raman Nagar, Marathahalli etc, I am in by no means saying that rent is equal to EMI.

    • Well, you are right, it is difficult but not impossible. In some cases you will get them, but you will have to look at older properties and by all means beyond fancy apartments. Bargaining will also help to an extent.

  • OD

    I found your article funny and a decent read, albeit a bit unbalanced. Credit can be a trap or an instrument of financial realization, depends on how you use it. Like you said it depends on the rate of interest, inflation, and the ROI on the investment. I dont prescribe to the idea that investing on credit is always a bad idea. But I suppose, there is a real danger in doing so.

    • Yes, investing on credit is beneficial if you understand the repercussions, play it wisely, have deep knowledge on RE and are willing to take the risk. But this works only in a market which has only manageable uncertainties and absolutely not in one like the Indian “Apartment market”. The prices there are scary and make zero sense. Also, you need to have a good backup and cushion. Else it is dangerous.

  • Subbu Mahadev

    Why no one (IIM guys, IIT guys, those so called gurus, so called good people, so called great warriors, or the Aam Admi party or shanti bhushan and the likes!!) is doing anything so that the real estate guys become transparent and honest and just do things right – as per the law?.

    It is either suggested – go with the crooks, or be a roman when in rome (that is, try your luck — buy apt, sell high, get rich, invest and it goes on ), or curse your luck and the industry and India and its people and system and stay in a rented house — and give some gyan about why you do what you do to yourself and convince yourself.

    IMHO, both are BS. (cant do anything about it, right?).

    How many builders and revenue officials have gone to jail for 100 years?. or a year?. take the big names in real estate industry?.

    It is a shame!.

    There is not a SINGLE website – from the builder, from the government, from the so called CREDAI etc.,

    that says – what are the MUST documents the builder must provide to a person before handing over property, that is a FLAT.

    The entire banking system for the most part in India is all BS. They give a loan to a Pakistani citizen (it happened!! guys) and you should stay naked in front of them to prove you have the male genital.. i mean, you have to prove you are an indian citizen, you live here etc.,

    And as pointed out — they dont go after the builder for not providing a SINGLE document, rather they after this poor fellow who got a loan — to which — the bank is also a party.. that is RBI!! and there by perhaps President of India too. :-)

  • Chandra Sekhar

    Interesting calculation, I would like to add something. So if the person took Rs. 30 Lakhs loan, he would have paid 20% downpayment also, that comes to Rs. 7.5 Lakhs. So if we take your above example, he would have lost Rs. 21.5 Lakhs by end of 4 years. Now the gain even comes down to Rs. 38.5 Lakhs. But tell me eventhough he would have compunded the same money annually, would there have been any other investment to get ROI of 41% (as final amount now he has is Rs. 60 Lakhs).

    So, I don’t think in any case that investment is bad. What do you say, just need to know if I am missing out anything.

    • Shankar Narayanan.

      Yes. You are missing out an important point which is the amount = EMI – rent (if you had taken a rented flat). This amount could have been invested and also would have given you a lot of peace of mind and also acted as a buffer to handle any emergencies. In my case, i got into a vicious loop where home loan was siphoning all the money that i had and i had to get a personal loan to pay off my marriage expenses and my entire salary was going to these 2 loans. So please dont do it. It will continue as expenses will become further and further (read children’s education, their career etc) and you will never spend your money on things that you should actually (like travelling around places etc).

  • subbu

    As per your calculations, now he is left with some money at least. If he wouldn’t have bought it, he should pay the same amount as rent. And it would increase 4 times in four years. At the end of the fourth year suppose his total rent paid would be say 10L, then what does it mean. Where has this 10L gone? Will he get a single paisa from that?
    As per you he has invested 11 L and made some 35L profit from it. Thing you should remember is house rent is the useless thing you do with your hard earned money. Home loan emi is the forceful savings you do. I’m not saying apartment is best. I’m just talking about home loan. It’s because banks have some regulations to increase interest rate(or decrease) where as your house owner has no reason to increase the rent( there is no way he will decrease it)

    • vizeet

      FD gives interest on saving you get. Simple calculation. Consider for same apartment rent is 10000 and EMI is 30000. You save 20000 which give you yearly interest of 8% in FD. While rent increases by 5-10% of 10000. You can do the calculation yourself.

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