A friend called me with a surprising question.

Let us call him M.D.

He bought a house in Navi Mumbai for about Rs. 80 Lakhs, – of this about Rs. 55 lakhs was funded by a loan from the State Bank of India. Over the last 4 years he had paid a lot of interest, but the principal outstanding was still Rs. 52 lakhs.

He was also doing some SIPs which had seen an amount of Rs. 33 lakhs, but now in this market was worth Rs. 30 lakhs – not too bad, but the IRR was not too great. He does not have any debt investments except his LIC endowment policies – and all the policies are together worth Rs. 30 lakhs.

So far fine. He just lost his job with effect from December, 2011 or Jan 2012…..

He will have to find a new job, NOW and immediately.

What is at stake?

Household expenses (including children’s school fees) …….Rs. 100,000

EMI                                                         Rs. 52,000

His needs are as follows:

Rs. 1.5L x 12 = Rs. 18L – assuming he gets a job in 6 months, he will need Rs. 9 L.

He is about 53 years of age – he needs to have his retirement corpus in place. He knows that jobs paying Rs. 25 lakhs and above are almost non existent especially in Sales and Marketing unless you are willing to take aggressive targets. In the bfsi space perhaps it is only a bank that will take him. How does a 53 year old join an aggressive and young bank? Not so easy….

He can always sell his house (he thinks it has appreciated, my take is the appreciation is LESS than the interest paid on the loan..but yes that is a choice. Options are few and far between in the jobs. Most people expect a 53 year old to be holding a technical qualification or an address book of potential clients…he has neither…

What does one do? Looking for answers…

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  1. It seems from your writeup the person makes anywhere from 18-25 lakhs a year. How does a person who makes that kind of money have only 60 lakhs of savings. The house was bought just 4 yrs back. Before that there weren’t any EMI’s too. The person is definitely spending too much if he has only 60lakhs of liquid assets. Moreover, even if he stretches this to 1crore by retirement.. its just not enough if he is already spending a lakh a month. Cut down on expenses boss.

    The house he should definitely be sitting on large profits. In last 4 yrs, his house price would have definitely gone up 50% or more. I leveraged and bought an aparment 18 mnths ago & I am sitting on 50% profits. Which is nearly 4 yrs worth of my current salary.

    Actually I think it might not be a bad idea to move into rented accomodation, sell the house, repay the loan, & invest the rest towards a retirement corpus. Rental yields in India are 2-3%, whereas interest rate on home loans is 10-12%. So ideally it only makes sense to buy vs rent when expectation of future return is 10% plus, which was definitely the case for past 10 yrs. But now i forsee a situation where prices of apartments are going to remail flat for the next 4-5 yrs to come. For those who think that can’t happen, its happened before in mid-90’s. What tax benefits he might lose on home loan interest he will gain on HRA. But life will be tough when he would have to retire without a home. But in the meantime the retirement corpus will grow & house prices won’t increase as much. And ofcourse he will get a new job, if not at 25lakhs, then at 20lakhs. Recessions don’t last forever. 08 was of 13 months. Big deal. Once there is stability in life, all sorts of avenues will open up. Get rid of debt, increase liquid assets. Not owning a house of your own is not such a big deal. Buy a new one 3 yrs down the line. You will probably get much better home loan rates then.

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