Simplifying the Maths behind home loans

Most of us borrow while acquiring a home. Gone are those days when our parents and grandparents saved throughout their lifetime with the 'dream' of constructing a house with their savings and retirement benefits like Provident Fund, Gratuity Funds, etc., and still the house remained unfinished to some extent. They hoped that their next generation will get a stable job and help built another floor before they get married.

Sounds so nostalgic, isn't it? In today's world, soon after getting a job, people get their credit cards, swipe it to pay down-payment for a two-wheeler. Within first year, most of them buy a four-wheeler, and the end of second year, they start looking to buy a one or two bhk flat after borrowing a home loan.

Now, our story starts here. In order to acquire an apartment in the city where you work, what is the price you pay? Here, we show you, how much you need to pay to secure the absolute ownership of that flat.

Preparations before you buy

Nobody buys the first house they see. We check out at least 30 apartments over a period of 6 months (or more) before we decide which home we would want to buy. In this process, you take a few off-days, call hundred brokers and builder's project sites, drive down to these places, eat outside and spend money. Now, this seems to be very natural and a must for all home-buyers. This cost of 'gaining experience' is a mandatory period for anyone. So, let's not cry over it.

Then, once the house is finalised for the purchase to be made, you start talking to your credit card company, bank, family & friends to arrange for the 20% of the cost of the property which you need to accumulate for the 'self-contribution' bit of it. You break your fixed deposits, Kisan Vikas Patra (KVP), borrow from Provident Fund account, sell/mortgage your jewellery and accumulate say, Rs 10 lakh (we are assuming the home you are buying is worth Rs 50 lakh here). You will also have to pay a brokerage & you arrange for that too.

Then you start comparing rate of interest (ROI) of different banks online & offline, meet a lot of sales executives, hard negotiate on processing fee and finalise on one lender and apply for the loan. After some paperwork & a wait-period you receive your loan sanction letter and go to the seller/builder to sign the agreement.

Here is when the surprise begins!

Banks told you their fee, builder told you their price, and broker told you about his commission, but did anyone tell you about the fees that you’ve to pay to the government. Yes, you must be aware about the stamp duty and registration charges, but do not the fees you have to pay to the India government while taking a loan. And you thought that acquiring a bank loan was all about an upfront processing fee for which you had negotiated your best and opted for a 'nil' fee bank. On top of this, you have the legal fees, valuation fee, administrative charges, documentation fee, franking charges on sale agreement as well as loan agreement (mortgage origination fee), intimation of registration charges—and the list goes on. That is when most of us cry out and start looking out for someone who can list out the 'charges' for us. Even after all this, your home is still not yours; it is hypothecated with the bank. You will get the title deed only once you repay the full loan amount with due interest payable in the next few years.

What you end up paying for a 50-lakh home loan?

Let’s chart out the actual cost of your home-buying. Guessing that you will continue with your home loan at least for 10 years as the approximately 8-10 years is the average Indian standard before someone pre-closes their home loans. Now, please find the chart below:

Now, you are reading the numbers correct. The cost of completely acquire a home worth Rs 50 lakh after 10 years using a housing loan will cost you Rs 1, 00, 89,076 (Rupees One Crore Eighty Nine Thousand & Seventy Six only). This is a tentative projection. With interest rate & other fees and charges fluctuating, it will vary.

But don’t lose heart. Your property in 10 years may be valued at Rs 2 crore. You will happily live in it during your hay-days of life, get tax relief from the government year-on-year and have the protection on your family's head. So, why wait till retirement and still do not fulfill your wishes? Go ahead and start searching for a home today.

(About the author: This article has been written by Sukanya Kumar,Founder and Director of RetailLending.com)