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 I 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 6 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. 7