A net worth of Rs 1 crore may seem like a sign of financial security, but a Rs 70 lakh home loan and other major expenses can quickly put that cushion under pressure. While a house adds to your assets, EMIs, maintenance costs and everyday expenses can leave you with less money to save, invest or fall back on during a financial emergency.
The real test is whether your income can cover your loan repayments and everyday expenses while allowing you to continue investing. A homeowner may have substantial assets on paper but still face financial strain if cash reserves run low or income suddenly stops.
A home loan, therefore, is not just a question of whether you can afford the EMI today. It is also about whether you can keep up with repayments, manage unexpected expenses and maintain your financial goals if your circumstances change.
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What Your EMI May Look Like:
Assuming the loan is for 25 years at 8% interest:
Loan value: Rs 70 lakh
Interest: 8%
Time: 25 years
Monthly EMI (estimate): Rs 54,000
Total interest: Rs 92 lakh
Total amount: Rs 1.62 crore
Rs 54,000 monthly EMI is not an easy commitment. Even if your salary is Rs 1 lakh per month, this is effectively more than half of that.
Scenario 1: Only Rs 1 Crore Appreciates
Assuming that you are able to manage the expenses and EMI with your salary, but have nothing left to invest. In this case, you will need to rely on appreciation of your existing assets worth Rs 1 crore to build long term.
Over 25 years, Rs 1 crore can become (depending on the asset type):
Investment amount: Rs 1,00,00,000
Investment duration: 25 years
Expected rate of return: 8%
Estimated returns: Rs 5,84,84,751
Total value: Rs 6,84,84,751
Without any new investments, you could be left with assets worth almost Rs 7 crore. Whether this is sufficient for you depends on your expenses, inflation as well as your other long term goals like travelling. At the time, your house will likely be paid off and could be valued at a significantly higher price, which can add to your net worth.
Scenario 2: You have income to invest
If after meeting your EMI and expenses requirement, you are able to invest as little as Rs 25,000 per month, you can build a substantial corpus in addition to existing wealth and house.
SIP amount: Rs 25,000
Investment duration: 25 year
Expected rate of return: 10%
Invested amount: Rs 75,00,000
Estimated returns: Rs 2,59,47,258
Total value: Rs 3,34,47,258
This can complement your portfolio, potentially adding to the net worth. Even if you do not invest, but simply build an emergency fund, you can end up with a substantial Rs 75 lakh fund.
Scenario 3: You lose your job
In this case, you may end up with a job loss while being in the middle of your EMIs. This can be a very challenging period and may push you to use your existing assets/corpus.
Assuming you decide to liquidate your assets and put it in systematic withdrawal plan:
Calculations show that you will need at least Rs 54 lakh to sustain the EMI over 25 years:
Initial value: Rs 54 lakh
Return on corpus: 12%
Withdrawal per month: Rs 54,000
Time: 25 years
Total withdrawal: Rs 1.62 crore
Balance left: Rs 7.45 lakh
In this case, you will be able to manage your EMI, while being left with around Rs 46 lakh of your existing assets. Without a regular salary, you may be pushed to use more of your existing wealth to sustain your lifestyle or restructure your loan or pre-pay the loan at once. But this can leave you with little corpus.
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This appears as a manageable scenario, but needs many conditions to be favourable to work. Considering the duration of debt to be 25 years, you need to be more practical with your portfolio. As a result, when buying a house, always consider what you can pay and not what loan amount you are eligible for. Unless you have substantial emergency funds and a considerable downpayment, long-durations of such high values can turn into debt traps.
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