In the last case study we saw how a couple could buy a home, based on their high earning power. But what happens when the situation is somewhat different? In this post I present an alternative case study to demonstrate this. Note that though the names are changed, all other data is accurate. We are talking of a family of 4 – Neeraj, his wife Swati and their children Ankur and Ayushi. Neeraj, who has been working in a Steel company for about 9 years, is 31 years old. Swati is a stay at home Mom 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 1.25 lacs per month.
- Current 3BHK home in a standalone building costs them 18000 Rs, inclusive of maintenance.
- Their other monthly expenses ( including one time ones ) come to about 30,000 Rs and they feel it may increase to about 40,000 Rs once Ayushi goes to a regular school.
- They are currently able to invest about 30000 per month, based on their goals. Neeraj has to support his parents to the extent of 10000 Rs per month, Rest of the money is for gifts, charity and indulgences.
- Neeraj is reasonably certain of being in Hyderabad for the next 8-10 years, till Ankur 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.
- Neeraj can look at a down payment of about 10 lacs and another 10 lacs for the interiors and furniture. He will therefore need a loan of some 70 lacs to buy the apartment.
Now Neeraj 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 understand how this will affect the cash flow of Neeraj and Swati.
- Once they move into their new home, savings on rent and taxes add up to 24000 Rs.
- Excess cash needed for EMI will therefore be 51000 Rs per month.
- As they were having surplus of 27000 Rs for gifts, charities and indulgences, they could look at funding 17000 Rs from that. This will seriously affect their lifestyle.
- Investments per month will now come down to nil as compared to the earlier 30000 . This is clearly a bad idea.
- In the interim period if their expenses go up due to some reasons, paying the EMI will also be a stretch..
It should be clear from here that Neeraj and Swati cannot afford the home that they are looking at. Factors to consider will be the stability of Neeraj’s job, the ability of Swati to get a regular job if needed, adequate life and accident insurance for both of them etc.The already high risk will then become completely untenable situation.
What options do they have in that case? Well, for one they can look at a less expensive home around same locality or look at a home of similar size and quality in East Hyderabad which is significantly cheaper. The approximate loan they can afford will be in the range of 45 lacs or so. This will still enable them to invest some money, though on a reduced scale. Another option can be for Swati to take up a job to ease the situation by having improved cash flows. A third choice can be for them to wait out 2-3 years and hope Neeraj’s salary increases reasonably in that time frame, by promotion or job change.
The key point here is that one should not leverage the home loan to an extent that it puts the rest of your financial life at a great risk. A home is very important but do not jeopardize everything else for it.
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