I had wanted to write this post as a follow up to the other home buying posts that I had written last week. However, i got distracted with the 100th post etc and was surprised to see that a few people asked me about it. So, here is the post I had promised about sharing my experiences of buying a home and managing a home loan.
When we came to Chennai in 1998 it was still possible to rent an apartment in a decent locality for not too much of a rent. We were able to get a good quality and new 2BHK apartment in Adyar for 6000 Rs and this went up to 8000 Rs when we left it after about 5 years. As Chennai was the first place we had lived in the south, we did not initially have any real plans of buying an apartment there. The trigger came in 2001 when I joined a new job where I wanted to be for some time, and we started looking in earnest when I became CEO of the company in January 2002. The children were in school by then and a long term stay in Chennai seemed like a real possibility.
There were several projects going on in those days and we liked one which was very close to where we lived in Adyar. It was a good locality and nowhere near as busy as it is today. The standalone building would have just 12 flats and was right on the MG Road, on the way to the beach.The builder was a reputed one and would arrange for the loan needed. At a price of 1925 per SFT and size of 1400 SFT for a 3 bedroom apartment it seemed the right deal for us. We ended up spending about 37 lacs finally with registration and interiors etc and were able to move in there by October 2003.
Funding the apartment required some careful thinking as I was not very keen on taking a big home loan if I could manage without it. The EMI was not the issue with my earning, but I have never fond of paying too much of interest if it could be helped. Fortunately, we got my wife’s PPF maturing around that time and could use it for the down payment of the house. As the payments were construction-linked we made a few of the initial payments on our own. The loan from SBI that we took was for 20 lacs at 11 % interest for 15 years. Till we took the entire loan amount we had to pay simple interest on the loan disbursed and EMI would start after that.
We shifted to our new home in October 2003 and started paying the EMI. With the tax break, it was a fairly decent deal – between rent for a similar accommodation and tax breaks we saved about 18000 Rs every month and our EMI was only a little more than that. Even then, I was interested in exploring paying off the loan quickly if possible as I was not fond of long term liability and realized that interest paid over the 15 year period would be substantial.
Though the rate was a floating one from SBI and the interest rates were coming down sharply, the bank wanted to charge us for shifting to the lower rates. We did that reluctantly as the rates had climbed down to 8 % within only 2 years of our taking the loans. However, I saw this practice as a discriminatory one to older customers and resolved to get out of the loan as soon as we could. To this end, we started making payments whenever we would save up 1 lac, typically every 2-3 months. My annual variable pay was also directed towards it. Some of our FD that matured in 2004 was also deployed towards these payments. Over the whole of 2004, we were aggressive in paying off the loan quickly and this meant that we had to jettison our other investment plans to some degree. However, that did not matter too much as I was clear we could get back on track with investments as soon as we were done with the home loan.
At the beginning of 2005 we took stock and saw that we had to pay another 5 lacs odd to square off the loan. This was also the time I was discussing a new job role which would require me to spend some time in Pondicherry and Delhi from March. Though it would stretch us financially quite a bit, both my wife and me thought it would be a good idea to get out of the loan before I took up the new job. We managed to pay off the loan completely by March 2005, much to the surprise of our Bank manager, who obviously wanted us to continue with the loan !!
How did we manage to pay off the loan in the short time period? Some of the factors were as follows:-
- The overall loan amount was a manageable one, as opposed to what one will require today.
- We were lucky to be making a fairly large down payment so as to keep the loan amount under control. This was possible as my wife’s PPF maturity coincided with our decision to buy a home.
- My salary was a relatively high one and it enabled me to pay off parts of the loan every alternate month.
- We had some assets like FD etc which we used to pay off the loan in a faster manner.
- For this period of 18 months, my entire focus was on paying off the loan. This was reflected in all the financial decisions I took in this period of time.
- In the final stretch, we were able to get some lucky breaks such as settlement money from my last organization etc which enabled us to pay off the final 5 lacs in just 2 installments.
What do I feel should ideally be done today? Well, given the fact that loans will be more in the range of 60-70 lacs for a 3BHK house ( not in Adyar, Chennai there it will need to be much more ), it will be difficult to set up the kind of schedule I did in 2005. Even then, I feel most people should look to pay the loan off within 6-8 years if possible. There is no point in paying a lot of interest and keeping your money in FD and debt MF which do not give you any real incremental returns. I think if you are having a home loan then one of your important goals will be to pay it off as quickly as you can.
Getting back to my story – we were in Chennai till November 2007 and shifted to Hyderabad thereafter, when I took up a job there. We have not bought an apartment here and the rent from our Chennai house is used to pay for it. Meanwhile the apartment in Chennai has gone up a great deal in value, mainly due to the location. We may sell it sometime in the future when we want to settle in Kolkata etc. looking back it was a good decision to buy the home then and to pay off the loan.
Why have I not bought something in Hyderabad? That will be the topic for another post.
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