Why Home Investment is the best way to save for future in India

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Published: 17th August 2011
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If we look at the investment preferences in India most of the people like to save money by depositing it in a Bank or Company Fixed Deposit while others invest in gold. There are a few who invest in a home / real estate while a few adventurous invest in a business or buy shares of companies.
Historical evidence has shown that over a long period of time (25- 30 years) the cumulative wealth of those who had invested in real estate and those who invested in a good business multiplied several fold compared to the rest. Both real estate and business investments gave returns to the investor that were much higher than the rate of increase in prices of goods and therefore multiplied wealth.
As per the facts real estate and shares in India have given compounded return of over 20% p.a. over a 15-20 year holding period. Fixed Deposits have given returns of 5-8% p.a over the last 20 years while prices of goods have risen at over 10% p.a in the same period.
If you carefully choose the location of your property, you can be a multi millionaire by the time of your retirement. Land is a limited if you happen to buy land in a fast growing location, you can be sure that the price of this land will be bid up over time. Land in Bombay has appreciated in value far in excess of that in Patna.
There are several instances of people who start Investing in a Home with a small investment of Rs. 10-20 lac. Having chosen the home wisely, they are in a position to sell the home after a few years at over Rs. 40-60 lac and then buy a new home at another strategic location. This "trading" continues to compound wealth at an ever increasing rate.
Analyse your Home Loan needs: You might have already decided to buy a house through a loan, but before you apply for a loan you must answer certain questions:
1. Can you afford a home loan?
You need to consider the amount of money that you earn as well as the stability of your income. Many people choose to take a more expensive home upfront as they think that their income will increase as a result of their income growth and career progress. Finance companies would normally give you a loan to the extent that your monthly repayments are less than 35-50% of your gross monthly salary. Lenders also take into account the liabilities of the person before sanctioning a loan. While they consider other loan repayments, they also look at the income from other sources to assess how much money would be available to repay the loan.
2. How much must you leverage?
Once you have decided on the property you have to buy, you should also decide how much of the cost can be funded by a loan. Normally leading Housing Finance Companies in India like HDFC Bank, SBI, ICICI Bank, Indiabulls, Reliance Consumer Finance, Bank of Baroda etc will loan you about 80-85% of the property value. You need to make a minimum down payment of 15-20% of the property value. Please also remember that you have to normally bear the following fixed costs before your loan is disbursed:
Processing and administrative fee (1.5-2% both included)
Legal fees
Stamp duty charges ( for resold property)
Property insurance premium
Accident insurance premium
Make sure that you have an asset base that is easily converted to cash (e.g. cash in a Bank FD etc.) to cover all charges including down payment.
As the value of the loan amount increases, the interest rate charged usually also increases. You may think of taking a smaller loan by funding the large down payment, by withdrawals from other investments. If your investments are in Fixed Deposits that are giving you about 7.4% p.a. after tax and the effective post tax cost of you Home Loan is 10% then this is a good idea. However, if you expect to make over 20% p.a. (about 13.5% post tax) by investing in shares or in a business, then you must borrow as much as you can on the Home Loan and not withdraw money from your other investments.
If you have identified other profitable avenues of savings that are expected to give you 15-20% returns p.a, you can use the Home Loan as a way of getting a cheap loan. In this case borrow up to the limit of 80-85% of the property value rather than withdraw cash from the other savings to make the down payment on the loan.

For more information about Home Loans in India and its interest rates, please visit for HDFC Home Loan.

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