Buying a house on loan? – All you need to know
Buying a house with loan is the one of the first option for many investors.
In addition, these people do such real estate investment, as they do not know how to invest their money.
Somewhere they have invest their money thats why they chose random investment due to some pressures from
their family, friend and neighbours etc.
In this article, I have tried to apply ” Time Value of Money” concept if you are trying to buying with a loan.
Lets have a scenario for Buying a House with loan…
Lets assume that you are buying a house worth 50 lakh.
In addition, the down payment is 10 lakh, and Housing Loan is 40 lakh.
And the interest on loan is 8.6% while House inflation expected to be 10% per year.
Moreover, the Loan tenure is 20 years.
Again, Lets assume that You are going to sell the house after 5 years.
Here, We can calculate the sale price using Future value formulae.
Future Value = Present Value*(1+R)^N
Present Value = 5000000
Number of years ( = 5
Rate of Return ( R) = 10%
In above image, You can see that the house sale price is 80 lakh approximately.
Now, it seems like that everything went well, and you may feel that you made a profit out of your investment.
But we should have to do some analysis to arrive at the profitability of your investment.
Lets calulate the E.M.I first and then we must apply “Xirr” formulae to all the cash flows i.e for the inflows and out flows.
In above image, you can see that the e.m.i for the loan is 35000 approximately.
Now, Lets calculate the loan to be repaid after 5 years, Once the house is sold out.
In the above image you can see the balance loan amount to be repaid after 5 years is 35 lakh approximately.
In addition, the profit made after deducting the balance loan from sale price of the house is 45 lakh approximately.
Now, lets try to apply “Xirr” formulae to the cash flows for buying a house as I said above.
Xirr Calculation for CAsh flows of buying a house with loan…
| S.NO | DATE | CASH FLOWS |
| 0 | 1/1/2024 | -1000000 |
| 1 | 2/1/2024 | -34966 |
| 2 | 3/1/2024 | -34966 |
| 3 | 4/1/2024 | -34966 |
| 4 | 5/1/2024 | -34966 |
| 5 | 6/1/2024 | -34966 |
| 6 | 7/1/2024 | -34966 |
| 7 | 8/1/2024 | -34966 |
| 8 | 9/1/2024 | -34966 |
| 9 | 10/1/2024 | -34966 |
| 10 | 11/1/2024 | -34966 |
| 11 | 12/1/2024 | -34966 |
| 12 | 1/1/2025 | -34966 |
| 13 | 2/1/2025 | -34966 |
| 14 | 3/1/2025 | -34966 |
| 15 | 4/1/2025 | -34966 |
| 16 | 5/1/2025 | -34966 |
| 17 | 6/1/2025 | -34966 |
| 18 | 7/1/2025 | -34966 |
| 19 | 8/1/2025 | -34966 |
| 20 | 9/1/2025 | -34966 |
| 21 | 10/1/2025 | -34966 |
| 22 | 11/1/2025 | -34966 |
| 23 | 12/1/2025 | -34966 |
| 24 | 1/1/2026 | -34966 |
| 25 | 2/1/2026 | -34966 |
| 26 | 3/1/2026 | -34966 |
| 27 | 4/1/2026 | -34966 |
| 28 | 5/1/2026 | -34966 |
| 29 | 6/1/2026 | -34966 |
| 30 | 7/1/2026 | -34966 |
| 31 | 8/1/2026 | -34966 |
| 32 | 9/1/2026 | -34966 |
| 33 | 10/1/2026 | -34966 |
| 34 | 11/1/2026 | -34966 |
| 35 | 12/1/2026 | -34966 |
| 36 | 1/1/2027 | -34966 |
| 37 | 2/1/2027 | -34966 |
| 38 | 3/1/2027 | -34966 |
| 39 | 4/1/2027 | -34966 |
| 40 | 5/1/2027 | -34966 |
| 41 | 6/1/2027 | -34966 |
| 42 | 7/1/2027 | -34966 |
| 43 | 8/1/2027 | -34966 |
| 44 | 9/1/2027 | -34966 |
| 45 | 10/1/2027 | -34966 |
| 46 | 11/1/2027 | -34966 |
| 47 | 12/1/2027 | -34966 |
| 48 | 1/1/2028 | -34966 |
| 49 | 2/1/2028 | -34966 |
| 50 | 3/1/2028 | -34966 |
| 51 | 4/1/2028 | -34966 |
| 52 | 5/1/2028 | -34966 |
| 53 | 6/1/2028 | -34966 |
| 54 | 7/1/2028 | -34966 |
| 55 | 8/1/2028 | -34966 |
| 56 | 9/1/2028 | -34966 |
| 57 | 10/1/2028 | -34966 |
| 58 | 11/1/2028 | -34966 |
| 59 | 12/1/2028 | -34966 |
| 60 | 1/1/2029 | 4522754 |
| XIRR | 11.89% |
In above table you can see that cash flows that are going from our hand are taken as negative.
While the money coming to our hand i.e profit made after clearing the loan is in positive.
In addition, After applying “XIRR” formulae using Microsoft Exel, You can see that the ROI from this house investment is 11.89%.
Moreover, the Loan interest rate is 8.6%, and the roi from the investment is 11.89%.
So, the actual profit from the investment is is 3.29%
Now, You may be feeling that It is worth investment of a house with loan right?
What if the if you house inflation is 8% or less for the 5 year period that We have assumed in the above scenario.
In that case what will be the sale price of the house after 5 years?. Keeping other parameters constant.
You can see in the above image that sale price of the house is 73 lakh approximately.
Now, Lets see the “Xirr” generate from new assumptions.
| S.NO | DATE | CASH FLOWS |
| 0 | 1/1/2024 | -1000000 |
| 1 | 2/1/2024 | -34966 |
| 2 | 3/1/2024 | -34966 |
| 3 | 4/1/2024 | -34966 |
| 4 | 5/1/2024 | -34966 |
| 5 | 6/1/2024 | -34966 |
| 6 | 7/1/2024 | -34966 |
| 7 | 8/1/2024 | -34966 |
| 8 | 9/1/2024 | -34966 |
| 9 | 10/1/2024 | -34966 |
| 10 | 11/1/2024 | -34966 |
| 11 | 12/1/2024 | -34966 |
| 12 | 1/1/2025 | -34966 |
| 13 | 2/1/2025 | -34966 |
| 14 | 3/1/2025 | -34966 |
| 15 | 4/1/2025 | -34966 |
| 16 | 5/1/2025 | -34966 |
| 17 | 6/1/2025 | -34966 |
| 18 | 7/1/2025 | -34966 |
| 19 | 8/1/2025 | -34966 |
| 20 | 9/1/2025 | -34966 |
| 21 | 10/1/2025 | -34966 |
| 22 | 11/1/2025 | -34966 |
| 23 | 12/1/2025 | -34966 |
| 24 | 1/1/2026 | -34966 |
| 25 | 2/1/2026 | -34966 |
| 26 | 3/1/2026 | -34966 |
| 27 | 4/1/2026 | -34966 |
| 28 | 5/1/2026 | -34966 |
| 29 | 6/1/2026 | -34966 |
| 30 | 7/1/2026 | -34966 |
| 31 | 8/1/2026 | -34966 |
| 32 | 9/1/2026 | -34966 |
| 33 | 10/1/2026 | -34966 |
| 34 | 11/1/2026 | -34966 |
| 35 | 12/1/2026 | -34966 |
| 36 | 1/1/2027 | -34966 |
| 37 | 2/1/2027 | -34966 |
| 38 | 3/1/2027 | -34966 |
| 39 | 4/1/2027 | -34966 |
| 40 | 5/1/2027 | -34966 |
| 41 | 6/1/2027 | -34966 |
| 42 | 7/1/2027 | -34966 |
| 43 | 8/1/2027 | -34966 |
| 44 | 9/1/2027 | -34966 |
| 45 | 10/1/2027 | -34966 |
| 46 | 11/1/2027 | -34966 |
| 47 | 12/1/2027 | -34966 |
| 48 | 1/1/2028 | -34966 |
| 49 | 2/1/2028 | -34966 |
| 50 | 3/1/2028 | -34966 |
| 51 | 4/1/2028 | -34966 |
| 52 | 5/1/2028 | -34966 |
| 53 | 6/1/2028 | -34966 |
| 54 | 7/1/2028 | -34966 |
| 55 | 8/1/2028 | -34966 |
| 56 | 9/1/2028 | -34966 |
| 57 | 10/1/2028 | -34966 |
| 58 | 11/1/2028 | -34966 |
| 59 | 12/1/2028 | -34966 |
| 60 | 1/1/2029 | 3816845 |
| XIRR | 6.67% |
You can see in the above table that the “XIRR” generated is 6.67%.
Now, what about the actual rate of return generated from the house investment scenario that we have assumed.
So, the actual roi is -1.93% with new assumed house inflation for the scenario that we have taken in this article.
In addition, It is very clear that you are not going to get “Positive” actual roi always.
As the house inflation is not your hand.
How much wealth you will accumulate if you invest E.M.I amount in a equtiy mutual fund Instead of a house investment?
Here, You can see in the above image that the corpus acculated in mutual fund investment is 39 lakh approximately.
And the rate of return assumed is just 7%. But mutual funds if invested wisely keeking your risk profiel and asset allocation wisely, There is a higher chance of getting far better roi than 7% assumed.
Things to keep in Mind while buying a house are…
It is always good buy a house for the purpose of residing in it.
And not for the investment purpose.
Because living in a own house gives you satisifaction.
In addition, Luckyly if your house price grows due to inflation, it will be additional advantage.
But you should not buy a house with loan by speculating the inflation for the house.
In additon, House consists two things…
- Land 2. Structure i.e house on land.
We all know land will never depreciate, and Land price definitey will grow to some extent due to inflation.
But structure value will depreciate every year.
It may be around 5% every year, and the house may collapse after 40 to 50 years.
and structure cost will become “zero”.
Now, tell me Is investing in asset where it will become zero is a good idea in term?.
Moreover, If your housing loan is floating rate rate loan.
Then Your Interest rate will go any point of time and You may not be in a good position pay the new e.m.i.
Again, you do not know what will happen to your health and career.
In case of bad health or loss of career, You will not be in a position to pay the e.m.i.
In additon, You may end up selling a loss also due cash need.
And Liquidity is the biggest issue in selling your house.
You may not get a buyer for months and years also.
Here, You may argue that You may get house rents, and it will be an additional advantage that I have show cased in the xirr calculation.
If you calculate the rental yield, it will be around 3% only in india.
If you consider the house maintance cost every year, House vacant period etc.
Your xirr will not grow that much.
Sometimes, You may get negative inflation also in real estate.
Please do not say that it will happen.
And do some research about negative roi in real estate.
You will get some examples like the sub prime issue in usa, and real estate fall in china after corona.
Conclussion…
Finally, It advisable buing a own house to reside is good.
In addition, buying a 2nd house is not at all advisable.
Intead you invest in financial assets like ppf, mutual funds etc based on your risk profile and asset allocation.
If you do so, You will be in a better position to achieve your goals like child higher education, marriage and your retirement etc.
And if you do not listen and invest in a house with housin loan, then if the inflation is not up to the mark.
Then Your actual roi will be negative, and yOU may become poor also in future.
To use the exel template that I have created click this link to download.
But do remember, You can edit all the cells the template.
