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Home loan
Prologue

Before you point it out, yes, there’s an oxymoron in the title – how can a loan be an investment? However, this is the twenty-first century – the mindset of loans and borrowings being a burden or a negative aspect of finance, is an old school theory. Modern economics teaches us how leveraging the balance sheet can lead to exponential growth in business because the logic is simple – if you can earn at a rate higher than the interest rate for the loan, you are already in profits. While most business people already understand this concept, it might be music to other people’s ears. And yet, irrespective of the people’s probation, there are very few smart investors who have understood and applied the same concept of leveraging to their investments and the process of wealth creation and accumulation. So, if you are reading this and can stay glued till the end of this article, well, you can become one of them – the secret is being unveiled, right here!

Background

When we take birth, we know nothing. We look around and learn – how to eat, how to talk and how to walk. There’s an education system through which we learn the basics of the world we are expected to live in, and then there is life which teaches us the advanced aspects of living. We fear tests and exams in childhood which are announced forehand with a fixed syllabus, however, life has its way of testing whether it is loss of job, loss of health or loss of those around us. Unlike exams, there’s an uncertainty in life and our job is to fill up the same if we wish a good life for ourselves and for those we care about. That’s the prime reason why we earn money – trying to earn more each time because that’s the centre of our modern life. While most people figure out a way to earn their livelihood, there are only a few who understand the magic of creating wealth. There’s no point in earning big in life, if you have no idea how to convert your earnings into wealth – the process of accumulating, managing, safeguarding and most importantly, growing! Investment in earnings is an important aspect often neglected, although paramount for a better life.

Evaluating investment options

When we start earning, the new money in our bank accounts automatically finds its way somewhere else – a mobile phone, a luxurious vacation, a car to commute, a long-desired hobby and of course, the vicious cycle of filling our wardrobes – always running out of clothes! However, there comes a point in life when the money slowly starts accumulating in our savings account and we have no idea what to do with it. That’s the point when people start thinking of investing money. We Google, and find every blah blah website talking about how equity markets are a great source of doubling wealth in a short period and the multibagger stocks that made people rich.

Equity and mutual funds

Equity markets aren’t everyone’s cup of tea. For short term investments, you need more vigilance and awareness of the market moves and other aspects, and for long term investments, you need a deep analysis of the company and industry portfolio. Most people don’t have both, so they opt for the next best option – Mutual Funds, sahi hai. Mutual funds are a good way of investing money, however, most people are stuck between the decision to either take high risks or earn low returns. Besides, equity markets, corporate debts and bonds, mutual funds and all other such options are liable to ‘immediate taxes’ which you have to pay every year. This impedes the process of accumulating wealth and do not forget, you won’t necessarily be in profits every year – it’s a Kabhi Khushi Kabhi Gham film.

Government schemes

People who face more ‘Gham’ in equity markets move on to Government and post office schemes because life has taught them a lesson on safeguarding their wealth – keeping it safe is the priority, growing the same is second. So, they choose to invest them in two types of funds – 1) retirement funds 2) long term funds 3) purpose-based funds. Employees Provident Fund, Public Provident Fund and other Pension Funds are well-known and successful Government schemes that help people build a corpus for their retirement. On the other hand, there are Government bonds, Gold bonds, Kisan Vikas Patra, etc which can serve long term purposes. The newly introduced Sukanya Samriddhi Account is a great investment option for parents of a girl child for securing their future. The best part about these schemes is that they are tax-free – exempt when invested, during the investment period and even during their maturity. Thus, the returns on the schemes are entirely yours, they are safe, offer collateral loans as well, and are also easy to manage, however, when fighting inflation, they fail to provide any growth to their wealth. Thus, you get back only what you earn – no bonus.

Insurance plans

Most people never discovered insurance schemes by themselves – there’s always an uncle who sells it to you or your parents. The income tax deductions, exempt status, the colourful brochures claiming to be the best plan ever, and of course, the FOMO effect that insurance agents add, leaves you with no other option than buying. Then other insurance agents sell you the unit-linked insurance plans which earn better returns than the other policies, however, most often do not enjoy the tax-exempt status. On the other hand, term insurance plans are more like paying ‘hafta’ to corporates during your life, to keep your family safe after your life. There are numerous insurance policies and you never know what the fine print of the policy contains – it’s just the uncle’s word who disappear after selling policies.

Gold and other bullion

Gold has been one of the most traditional methods of wealth accumulation and when compared to accumulating cash or bank balance, gold seems to be a much better option. However, when you fully understand the concept of gold and the fluctuation in its prices, you will realise that it only offers you the same amount of money that you invested years ago, in any year into the future. Gold in form of jewellery can be good for those who love to wear it, however, there’s an extent to which you would like to accumulate the same, as it’s not easy to keep them safe. Most jewellery contains artificial elements as well which make the jewellery attractive, however, are an expense for you, as they erode over time, unlike gold. Gold keeps you protected against inflation, and also against Government rules, however, there’s no growth of wealth.

Investing in Properties

Property investments are one of the most unpopular investment options amongst the common people while one of the most popular investments amongst the wealthy. This is because buying property involves a lot of hassles and not everyone wants to get into complex investments. Firstly, finding good properties is not an easy task. You need a good broker and zeal to understand what good properties are and the effort to explore them. Then, there’s paperwork – lots and lots of paperwork. There’s the involvement of Government and public officers and their lethargic lifestyle that makes your paperwork further complicated. You ought to have a lot of patience to buy properties, and also a lot of money as well. Land and buildings at good locations have competitive bids and therefore, it is not easy to buy them, if you have limited funds.

After all hassles of buying the property, you have to maintain the property and safeguard it from encroachment or illegal possession and many other problems which may not be an easy job everywhere. Another bigger risk in property investments is the risk of natural disasters – Act of God, you can foresee them. There are property and other related taxes that you have to pay every year. You have to ensure that you possess all the necessary property documents and keep them safe so that when the need arises, you can prove your claim to the property. Overall, buying or maintaining properties is not an easy task and involves many problems – seen and unseen. And yet, we recommend they are the best form of wealth accumulation – not only for the wealthy but also for the middle class and lower class people. Buying land and property is a complex investment, however, the modern world has the requisite solutions and safeguards to make things less complicated and safer. Let’s address them one by one.

What if I don’t have the money to buy?

The elephant in the room – Money. Most people think they do not have the money to buy the property. However, home loans are available for everyone and with ease. Housing loan companies have eased the process of taking home loans by far, over the past decade and with very minimum documentation you can easily take a home loan. Your Chartered Accountant can easily help you with the process of obtaining the loan and the documentation involved. Home loans have several benefits and most often, even if people have the required money to buy a property, they still opt for a home loan, given the benefits it provides.

  1. The rate of interest is lowest on home loans amongst all types of loans. Thus, you are paying the least amount of interest, as compared to other types of loans. Besides, the tenure of housing loans is long and monthly instalments can be easily adjusted according to your earnings.
  2. The margin requirement in home loans is usually around 80%. This is lower than the margin requirement in business loans. Of course, you will need the lump sum amount for the margin i.e. down payment, however, once you pay the same, the property is yours – just keep paying the subscription fee (EMIs). For example, a property worth INR 25,00,000 can be bought with INR 5,00,000 down payment and an approximate INR 15,000 in monthly instalments for 15 years.
  3. The interest, as well as the principal portion of the home loans, are tax-deductible expenses. Thus, you can easily complete your tax investment quota by buying property against a housing loan – two problems solved with one act. You don’t need to worry about tax savings schemes every year, as the housing loan shall continue for long period.
  4. Even if you have the corpus required for buying the property, it would be a good idea to get a home loan, as the same is not only available at a lower rate of interest, but also tax-deductible which makes the overall rate of interest almost equivalent to the rates applicable to long term fixed deposits. Thus, if you can invest your funds elsewhere and earn a better return, you can make additional profits.

How to ensure proper paperwork and safety?

Paperwork is unavoidable, however, often property agents help the customers with documentation as well. If you buy a property that has been constructed by a construction company, usually the documentation would be clear and available easily as such companies are liable to more compliances. Most importantly, such companies also arrange for financing arrangements and take care of most of the documentation involved mutually. If you are obtaining a home loan, the housing loan company would anyways ensure that all necessary documents are taken by you and handed over to them. This not only serves as an audit of your documentation but also safe custody of your documents, as now the housing loan company shall be liable to keep your property documents safely. Overall, paperwork still wouldn’t be easy, however, this is a one-time investment of your time, as once completed, the property is yours and it won’t be easy for any other person to claim the same, as the documentation trail is long and difficult to prove wrong.

When it comes to safety, it is important to take property insurance – choose a good insurance plan with addons as may be required; insurance plans have been made easier and cheaper by the IRDAI recently and therefore, you can cover yourself against calamities. Maintenance is another important aspect to ensure proper upkeep of the property to retain its value in the long run. Choosing a property in developing areas or areas for which town plans have been issued, is a better option than ones located in remote areas.

How does a home loan create wealth?

A home loan helps in creating wealth. Property investments are long term and go across generations, providing not only you but also your children with stable financial status.

  1. You are getting a property in your name, at 20% of its cost subject to payment of future instalments. Thus, your wealth is set to grow, if all goes well.
  2. You are saving taxes and also forced to save every month from your salary to pay the loan, unlike investments, where you may opt not to invest a particular month or an year and may end up expending it elsewhere.
  3. Your earnings are automatically converted into wealth and the same is safe, as the home loan ensures proper documentation, safe custody of the documents and also your title to the property.
  4. If you are buying a home for your residential purposes, you will save a lot of rent expenditure over the years. In long run, it is always better to buy a property than to rent it. Meanwhile, if you are buying the property as an investment, you can rent it out to other people and they would take care of the maintenance besides paying you rent. This will automatically help you with repaying the loan and thus, your wealth may even grow entirely on its own.
  5. The most significant return would be the increase in the value of property by the time you pay off the entire loan. You can sell the property thereafter, or even mortgage it for business loans. If you choose the property location wisely, the value can be multiple times the original purchase value over some time.
  6. Capital gains tax on the sale of the property can be set off by purchasing another property. Thus, you can increase your wealth, without paying taxes, if you continue buying property after selling one.
  7. Home loans also offer top-up loans for furnishing your house and other purposes.
Conclusion

Home loan rates are at the lowest of what we have seen during recent years. Although the same are floating rates and the banks or NBFCs may change the same every quarter, it may take some time before the same happens and in the interim, you can save on the interest expense. Property investments involve a lot of efforts initially, however, once a loan is sanctioned and property is bought, you may safely assume that your wealth is set to increase as it not only results in wealth accumulation but also taxes savings during the same period. Finding a good property may require your time, however, once found and purchased, you need to maintain very little vigilance over your investment, unlike investments in equity where you need to stay in touch with your investments. Unlike Government schemes and insurance plans, property investments save your rent or earn you rent and the property value also increases, at the same time and thus, ensure the growth of your wealth over and above inflation. In conclusion, property investments are the best investment and with home loans, a unique way of wealth creation through loan, in the long run, if the initial phase is handled properly.

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