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Housing + Loan + Calculations = Headache

Posted by Sankar Khrishnamurthy under

Housing,

Investment
1 Comment
Given the current talk about sub prime mess in the US and its fallout, I got to think about home owner ship itself. From the perspective of a prospective home owner, not as an economist or lender or an investor into CDOs.

Let us say that I find a house to buy for 30,00,000 in Chennai (yeah, me dreams quite a lot ;-), so sue me). Say I am able invest 10,00,000 out of my own pocket and take a loan of 23,00,000 to pay the rest and to cover other transaction costs. Let us assume that a lender agrees to loan me the amount at 10% fixed interest rate for a 10 year term.

At the end of 10 year term, I would have paid the lender 36,47,360 (Nifty Mortgage Amortization Schedule Calculator).

Assuming that I had put the 10,00,000 down payment instead into a 10 year term deposit earing 8% interest per annum, cumulated annually, it would have ballooned into 21,58,925, a good 116% appreciation.

So, my take is, the total invested at the end of the 10 year term is 58,06,285. My down payment money and the interest it would have earned, the loan amount plus the interest I paid. If I would not have dipped into the down payment and interest purse. A Big If. If I sell the house for 23% on top of this, I would get a 116% appreciation on the total investment of 33,00,000. But then why should I do this? For all I know, all things else being equal, I could have just earned the same on a term deposit.

I haven’t taken into consideration other costs and parameters over 10 years – taxes paid, maintenance, inflation, opportunity cost, whatever-else-that-could-put-my-naive-calculations-in-jeopardy.

So, just to ensure that I get a good return, say 70% (thrice 23%) I would have to sell the house at 98,70,685. This is about 200% appreciation on the original 33,00,000. Is 200% ROI over 10 years worthy of taking such a risk? If I factor in other expenses and parameters the actual ROI would be even less.

What sez you?

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March 7, 2008 at 2:43 am

Very interesting and useful post.

I add your interesting blog in my Google Reader! 😉