In the last post we saw the issues related to first time buying of a home. In this post, I wanted to clarify some of the context through a case study. Note that though the names are changed, all other data is accurate.
We are talking of a family of 4 – Ravi, his wife Madhuri and their children Ankit and Naina. Ravi has been working in IT for about 9 years, is 31 years old. Madhuri is a freelance web designer now and the children are 3 and 7 years old. They currently live in Hyderabad in a rented accommodation and are looking at buying their first home. Some data on the case are presented below:-
- Their total take home income is about 2 lacs per month, out of which Ravi contributes 1.6 lacs.
- Current 3BHK home in a Gated community costs them 28000 Rs, inclusive of maintenance.
- Their other monthly expenses ( including one time ones ) come to about 40,000 Rs and they feel it may increase to about 50,000 Rs once Naina goes to a regular school.
- They are currently able to invest about 1 lac per month, based on their goals. The rest of the money is for Gifts, Charities and indulgences.
- Ravi is reasonably certain of being in Hyderabad for the next 8-10 years, till Ankit goes to college.
- They are looking at a home which is a Gated community in West Hyderabad. The total costs will be in the region of 80 lacs and associated expenses like interiors, replacement furniture etc will move it closer to 90 lacs.
- Ravi can look at a down payment of about 10 lacs and another 10 lacs for the interiots and furniture. He will therefore need a loan of some 70 lacs to buy the apartment.
Now Ravi can get a loan of the needed amount with an EMI of 75000 Rs for 15 years. Over the period of time his overall payment including principle and interest will be about 1.35 crores. Let us now ubnderstand how this will affect the cash flow of Ravi and Madhuri.
- Once they move into their new home, savings on rent and taxes add up to 34000 Rs.
- Excess cash needed for EMI will therefore be 44000 Rs per month.
- As they were having surplus of 30000 Rs for gifts, charities and indulgences, they could look at funding 10000 Rs from that. It can also be more but that will seriously affect their lifestyle.
- Investments per month will now come down to 66000 Rs as compared to the earlier 1 lac. As their income grows over the period they can bring this up gradually.
- In the interim period if their expenses go up due to some reasons, investments will suffer further.
On the balance, it seems that Ravi and Madhuri can go for this. Factors to consider will be the stability of Ravi’s job, the ability of Madhuri to get a regular job if needed, adequate life and accident insurance for both of them etc. As long as these are taken care of things should work out fine.
What happens though, when the income of a couple is not at such a high level? Does the equation change? We will look at an alternate case study tomorrow to understand this.
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