Khota Paisa

The Impact of Home Loan

Posted in General by khotapaisa on September 14, 2009

Yesterday I saw a movie “Fun With Dick & Jane” on TV. The movie is about a V.P. of a big company. He has a big house, a luxury car and every other thing that defines luxury. One day he goes to office only to be told that the company has collapsed. He comes back home(rather happy) thinking that he will now have some free time before he starts in his new job. Months pass without job and he reaches a stage when he has no money and no job. All his savings are gone now. His stocks (read ESOPs) are worth penny. He now decides, along with his wife, to slowly start selling all big-ticket items in the house. This starts with his BMW being traded for a cheaper car. Then the large flat-screen TV is goes out followed by other household appliances. After few months, there is no worthwhile item left in house to trade for. The movie continued thereon but I realized that this is a very possible scenario for many of us. From the industry I come, it is even more plausible. Imagine someone earning 90,000/- per month. He has a home loan EMI of 40,000/- in addition to a 7,000/- car loan EMI. His overall monthly expenses are around 35,000/-. Now if this person looses job, he will need 82,000/- per month to take care of his basic needs. Even if he cuts back on his household expenses, he will still need anywhere around 75-80,000/- per month just to survive. Assuming that he has 2 lacs in emergency fund and another 5 lacs in stocks etc, he will run out of money in about 9 months. In fact most of the people who take home loan early during their career, are usually left with no money as they put their savings as down payment. Fortunately in India, we have a safety net called family. We can get much needed money from our parents, brothers etc. But how would someone be able to fund a 75,000/- per month expense?
On the other hand, if he had not taken a big home, his monthly requirement would have been around 45-50,000/- (including rent of 10,000/-). This would mean that he had about 15 months to look for job.  He also has the option of going for a lower rent to sustain longer. It shows that buying a house early in your career may not necessaroly be a great idea. You should buy house only when you can afford to pay a significant amount as down payment. This invariably means that you wait for 10 years or more in job before planning to buy a home.


2 Responses

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  1. Pavan said, on October 24, 2009 at 11:24 pm

    You just can’t generalize that. A friend of mine took a home for 10lakhs the moment he joined job. And in an year, that home’s value got increased tremendously to 30lakhs. He just sold the home and cleared his debt, left for further studies with the rest of money.
    He took that home for himself, and never thought he would sell like that.

    So, you just can’t predict. One thing is for sure, better consider buying home only when it is needed, not to jump as 80C savings or not to think as a must have property with a s/w engineer as an image.

    By the way, your blog seems to be more of money investments related. Good to know this.

    – Pavan

    • khotapaisa said, on October 25, 2009 at 10:19 am

      Hi Pavan,
      I am not generalizing it. It’s just that there are more than few instances like this around us. It’s not about buying house being a bad thing. It’s about the money-sense behind the buy. It’s important to make sure that you can afford it. When people agree to pay 40-50% of their income as EMI, they don’t consider the affordability. As you mentioned, buying house should not be 80C, peer-too, interest rate etc driven. Afterall, it may well be the costliest item you will buy in your life.

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