Mad_About_Money_final Mad About Money_Dec 2016 | Page 6

MadAbout

MadAbout

Money

DEBUNKING MYTHS
ABOUT BUYING
A HOUSE

Money

A HOME IS CONSIDERED AS ‘LIFE’S BIGGEST PUNJI’ (PRIME INVESTMENT) BY MOST
ELDERS IN OUR SOCIETY. TRADITIONAL WISDOM SAYS THAT OWNING A HOME IS
A SIGN OF UPWARD SOCIAL GROWTH AND CLASS-STATUS. THE EYEBROWS OF
JEALOUS RELATIVES ARE RAISED WHENEVER A YOUNGSTER OF ANOTHER FAMILY
ENDS UP BUYING A HOUSE. SAME TRADITIONAL BELIEFS HAVE GIVEN BIRTH TO
TODAY’S ADAGE OF ‘IF YOU ARE A RENTER, YOU’RE THROWING MONEY AWAY

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s this true? Do these
assumptions hold till
date? Is the dilemma of owning a home
or living on rent, is no
dilemma at all?
Since time immemorial,
there has been a huge
emotional connect and
psychological boost
associated with owning a
home. People say- ‘Bear
the pain now, so you can
rest later’, ‘These are the
only times you can take
risks’, etc. etc. But will
buying a house, prove
to be a smart financial
decision or is it smarter
to continue to live in a
rented apartment?

TRADITIONAL
ASSUMPTIONS
OF OUR ELDERS
Times have changedthe world has become
a highly competitive
place to be in, private job
market is very unstable,
prices are skyrocketing,
new generation likes
the freedom and lack of
commitment that comes

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with living in a rented
home, and most of all, it’s
not easy to get through the pressure which
comes with mortgage
period.. Let’s investigate
if traditional assumptions
of our elders have any
solid grounding as such.
Before continuing with
deeper discussions in
coming chapters, I want
to level the dice between
buying a house and living
on rent by subjecting our
stereotypes to acid test.
This chapter will burst
age-old myths which
downgrade the decision of living on rent and
over-hype the decision of
buying a house.

Myth #1

My motive is not to
persuade or dissuade
anyone from buying/
renting a house. I want
to disseminate unbiased
financial knowledge in
the simplest language
possible to prevent this
generation from becoming a prisoner of wrong
financial decisions.

Does it? Let’s see why the
logic is flawed.

Rent goes towards
expense, while
buying a house
builds equity
(investment)
It is a most commonly
used argument by real
estate companies. According to the argument,
the entire rent goes in the
landlord’s pockets and
contributes nothing to
one’s equity (asset); instead owning a home contributes to equity which
makes paying mortgage
EMIs totally worth it.

Things you OWN – Things
you OWE = EQUITY
Have you ever wondered how much of loan
repayment goes towards your property you
own (principal) and how
much of it goes towards

paying what you owe
(interest, insurance and
tax)? The reality is, only a
small chunk of your EMI
contributes to equity,
all else goes towards
paying interest, taxes and
insurance, especially in
initial repayment phase. It
is called amortization of
loan. The picture below
portrays it well. Please
note that, the interest
component in green is
about multiple times that
of the principal component in orange for more
than a decade.
For example, if you buy a
house worth INR 70 lacs
by taking a home loan of
INR 56 Lac @ 9.35% p.a.
for 20 years, the interest
and principal components will not come
equal until at least 12.5
years of your mortgage
period. So for more than
a decade, you will not be
investing a major part of
your income towards building home equity rather
you will be paying back
what you owe.

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