Housing Loan in India – How much do you save??

Have you ever wondered what do you actually save by going for a housing loan in India??

No. Then just go through the following example and work out what is the actual cost which you would incur.

Example: Residential house in Bangalore outskirts.

I’ve taken best case scenario for the points which is beneficial to you and worst case scenario when it is going to affect you negatively.

Prevailing rate for built up space: Rs. 2300 to 3000 per ft2 (Rs. 2500 is considered for this eg.)
Built up area: 1000 ft2
Tenure of the Loan: 15 years
Type of interest charge: Floating
Rate of interest: 11.75%
Equated Monthly Installment (EMI) as a % of total income: 40%

Working for cost of the flat

Sale Value (1000 x 2500) = Rs. 25,00,000.00
Taxes (6.12%) = Rs. 1,53,000.00
Effective total cost of flat: Rs. 26,53,000.00
Bank Loan: Rs. 22,55,050.00 (i.e. 85% of the total cost)
Own Contribution: Rs. 3,97,950.00
EMI = Rs. 26,703.00

The effective price being paid for the loan (26,703 x 12 x 15) = Rs. 48,06,540.00
Additional cost by way of Interest = Rs. 25,51,490.00

WOW its more than the amount of loan availed. Have we ever given a thought to this???

Forget it look further…. Lets have a look at the tax benefits which we can avail to set this off.

To make the calculation simple I’m assuming that the interest payment contributes 50% of the EMI payment and the rest is principal.

To avail the above mentioned loan amount the gross income of the buyer should be atleast Rs. 8,01,090.00 per annum. The income tax before the deduction of the tax benefits on the housing loan will be around Rs. 1,76,000.00 (Assuming that the buyer has a invested his funds sensibly to get the max. tax benefit)

The tax relief which the buyer can avail for principal re-payment is Rs. 20,000.00 and another Rs. 15,000.00 (Rs. 75,000 x 20%) totaling to Rs. 35,000.00. This means that the effective reduction in EMI is Rs. 2,917.00 per month. So, the actual cost which you pay for the loan is (26,703 – 2917) x 12 x 15 = Rs. 42,81,480.00

This reduces your overall liability by Rs. 5,25,060.00

In the net effect you are going to pay Rs. 46,79,430.00 (Rs. 42,81,480 + Rs. 3,97,950.00) for a flat which you are going to own after 15 years.

For the whole calculation I’ve considered only the present values assuming that the inflation and the interest rates in the economy have a direct impact on the real estate sector. So, will get compensated in the long run and the net effect will be reflective of the current prices.

Have you ever thought about this effect when you are buying a property??