Have you ever realized that in India when you pay an EMI there is very little towards principal and much more towards interest?

When you are say 30 and you go and get a big, big housing loan, let us look at what really happens. You are young, confident, and your wife (and everybody else!!) give you solid advice “You will buy only one house, so stretch and buy a big one”. So you did stretch and you bought a house with a Rs. 50,00,000 loan. Good congratulations. You are sure you could repay Rs. 45000 per month as an EMI and so you got the loan papers. You realised that the EMI actually comes to about 52,000 including some term insurance premium adjusted over the life of the loan. You were wondering where the remaining 2k will come from, but did not bother too much.

When you went to Hdfc for the loan you were still wondering how to pay 52k per month. Then like God the Hdfc girl across the counter said ‘Sir you can reduce the EMI by increasing the tenor of the loan. Wow. You did not know that did you. So the little angel did a quick calculation and said ‘Sir your EMI is Rs. 47,616 , but the tenor will be 30 years. Your wife was cursing that there was no 40 year loan or you could have bought that 2bhk instead of the 1bhk hole in Mumbai that you bought for Rs. 72,00,000.

What exactly happened? Well in a 20 year loan you were paying an EMI of Rs. 51609 – and the total interest that you would have paid over a 20 year period would have been Rs. 73,86,261. Whereas when you changed the tenor to 30 years, your EMI surely fell to Rs. 47616 but since you are going to pay for a longer period, the interest paid will be Rs. 1,21,41,821. THUS THE INTEREST THAT YOU WILL PAY IS GOING UP BY Rs. 51 Lakhs!

Now by taking a big loan of Rs. 50L you have that much less in your Retirement corpus.

Now by taking a loan of Rs. 50L you have given away the gift of compounding to Hdfc instead of harnessing it yourself.

– the interest that you pay is about 2.5 times the amount borrowed

– the cost of your house at the end of 30 years is Rs. 2 crores (interest has to be added, right?)

– what if the RE does not appreciate by 11% per annum – the cost of your loan?

– you cannot now argue that the house has appreciated so as to augment your retirement corpus

– you will need a bigger term loan to cover the mortgage for a longer period.

I am not trying to say do not borrow or do not borrow for a long tenure (bless your soul, I am a shareholder of Hdfc and have been one for the past 35 years, so I love you for giving the compounding power to us).

Just understand what you are doing is going to @#$%^&* up your Retirement corpus.

Then choose your priorities.

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  1. Average payback period of homeland in India is 8 years which means people prepay often to close it earlier. Hence you may not end up paying so much interest. As you have rightly written always understand what you are doing. A worthy article this time.

  2. Hi sir,
    Completely out of context, but I have some questions with respect to shares.
    I see that you have invested in HDFC.
    I would like to know how to choose a company in an industry?
    For example, LIC Housing Finance vs HDFC vs Indiabulls Housing Finance. I’m not comparing apples to oranges as I’m comparing companies in the same industry.
    What are the parameters I should check?

  3. Subra Sir – on a related note, what is your view on education costs hurting retirement planning, particulary schooling expenses? In Gurgaon the fees for most of the well-rated schools are ranging from 40-50K per quarter (and increasing by 10% a year!)

  4. Excellent.The best. What I have learnt in personal finance.Even a newbie can understand this logic. I salute you Sir. Thanks.

  5. @Graham.
    Average loan includes people who take loans for home improvements, buying smaller houses (< 10 lakhs) etc. Similarly, average life insurance policy value should also be less. One can form wrong inferences based upon that number.
    Not many of them visit this blog.

  6. I agree that one will be paying a huge amount extra but one doesnt encounter the shifting cost of a house and the headache behind it. Also I agree with Graham that avg payback time is around 8 years and if u calculate with 8 years timeframe then buying house is a good option rather than having hassles of living in a rented apartment.

  7. “fools build houses; wise men live in them” – Chinese proverb

    ” self occupied house is not an asset; home loan owner is an ass” – New Indian proverb

  8. It really pisses me off when people self-righteously propose that I fund a 70 lac loan to buy an on-paper house, in some remote part of Gurgaon whose desolate, pot-holed vicinity resembles the lunar landscape. Then they act annoyed when I counter-argue.

  9. Thanks a lot Subra for such an wonrderful article.

    Sadly , in india , buying home ( rather taking home loan burden ) is the most proud decision ever made by the people .

  10. An house property of 4x annual Salary… Is still the median even after decades. Me thing it is the tipping point beyond which other goals get impacted.

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