The Palimpsest of Sawbones Surio

Pessimism of the Intellect, Optimism of the Will

Retirement planning for “free”: A case study of a case study involving 1.2 crores

with 28 comments

Hello everyone! I am back! Inspired by Maus’ “internet fast”, I had undertaken a somewhat similar one myself. I would heartily recommend it to anyone. Regular transmission is back… until the next fast that is! :-P

Every week, The Hindu BusinessLine newspaper carries readers’ stories along with their financial data, their concerns and their enquiries regarding financial planning steps and their dreams about early retirement. Readers might recall that I had carried a one such story on the blog from the same newspaper on an earlier occasion.

Of some interest to me was today’s reader case study. Although not exactly about early retirement, the discussion that I had with DW on the case study as well as the points the study did not cover, opened more interesting questions and what-ifs, that we decided to share it with a wider audience. Here’s a brief breakup of the data of interest to us.

  • 32 yo, son aged 2, take-home salary is Rs 55,000 a month (SISK – Single Income Single Kid). Salary expected to grow at 10% pa
  • Home Loan monthly repayment is Rs 22,700 (loan amount: Rs 25,00,000 (25 lakhs), loan tenure 25 years)
  • monthly household expense is ~Rs 18,100 (15000+3083 insurance premium) leaving a surplus of ~Rs. 14,000 for his investments

Objectives for this person:

  1. to pre-pay the principal portion of the home loan and to close the loan in 10 years
  2. to save for my child’s higher education, I may require Rs 40 lakhs
  3. for my retirement at 58 years (26 years hence) with a corpus of Rs 1.2 crore.
  4. planning to take a foreign tour in the next four years for which I need to save Rs 10 lakh

BusinessLine, please advise?

(Un)Known-(Un)Knowns: Choose your title ;-)

  • The man’s wife must be reeallly good at managing expenses. If I could contact them, I would definitely be asking them questions on how they manage with Rs. 15,000/month in Mumbai 8-)
  • Household expenses will shoot up for certain once his son starts (pre-)school. See here and here
  • for a representative sample. In fact, I get such appalling numbers and stories about extortion development fund and daylight robberies fees these days, I am looking at homeschooling as a very serious option. With our own IIT/IISc National Programme on Technology Enhanced Learning (NPTEL), MIT OpenCourseWare and Khan academy it has become more and more possible and easier than most people think! And yes, it’s legal in India too!

  • “Higher education” from an Indian context starts by college (UK: after A-levels), i.e., only by the time boy turns 16 years of age. The 40 lakhs isn’t needed until that point.

Foreign trip

I am going to tackle objective no. 4, chiefly because it is something I personally do not empathise with. My own sentiments on international travel concides with Jacob Fisker’s experiences, but compounded by my AVML/JVML requirements. So, if the man needs to have 10 lakhs for a foreign tour four years hence, he needs to invest all of that Rs. 14,000 surplus in equities, earning 12% pa (as per the journo), starting this month. This investment will return roughly Rs. 11.5 lakhs by the end of five years. I have deliberately omitted in this calculation, the additional contributions per month of approximately Rs. 1300, Rs. 2000 and Rs. 3200 that will be added to the surplus amount by years 2, 3, and 4 respectively due to the increase in pay. If those are factored the trip is a reality by the fourth year (It would seem the man isn’t stupid, for he seems to have worked these things out already and had a year in mind in his query).

What the journo doesn’t discuss in the paper is the “true cost” of the trip from a retirement/FI perspective, which is not Rs. 10,00,000, but Rs. 33,333,333 (that’s 3.3 !crores!). But true cost aside, this actually leads us to the classic discussion of “opportunity cost”, i.e., take the trip and you’ve totally foregone both your retirement corpus *and* your son’s education corpus for the next five years! Personally, keeping in mind the coming turmoil with onset of peak oil and job stagnation/outsourcing to other parts of the flattened world, I would say “to hell with the trip” and focus on the other priorities.

Retirement/Education Corpus Fund

According to the newspaper, Rs. 8000 invested for 15 years in equities yielding 12% pa would cover the 40 lakh education corpus and ~Rs 5600 invested for 26 years as above would cover the 1.2 crores for his retirement. Two factors not discussed by the paper, are additional insurance that the man needs to take (1.1 crores!) and how Rs. 8000 of the son’s corpus would give the retirement corpus a bigger boost from the 16th year onwards.

Pre-closing the home loan

The newspaper has treaded the hackneyed line (CYA?) in this regard.

“As long as the current tax benefits are extended for home loan interest repayment, it is better to avoid pre-payment of the loan”.

Personal Context: Yours truly is one of the many that was conned advised along the same lines and in a misguided moment of sheer adrenaline induced frustration madness, signed on the dotted line only to repent it in leisure since. After a long hard look at the facts and figures of this big concocted lie called “home ownership”, I have taken a somewhat contrarian position towards homeownership. I am not alone in this and here’s a few Indian articles questioning the rationale, empirically and with numbers.

So, back to the story, the fact that the man is being asked to base a long term, financially draining commitment on the whims of “tax-savings” and not based on numbers is a poor piece of advice, IMO. One main gripe I have with such advice is the outright refusal to consider increasing one’s monthly payments towards the loan to one’s advantage.
For the loan amount of Rs. 25 lakhs, based on his EMI amount, he is being charged 10% pa interest. So, by the end of 25 years he would have paid out Rs. 68,15,043 (68 lakhs) to the bank of which the interest is Rs. 43,15,043 (43 lakhs)!

Annually, the man pays out Rs. 2,72,400 towards his home loan (10% interest rate, revised every 3 months — only going to go up under current inflation trends!). Of this, he claims 1.5 lakhs as tax exemption under the tax code. Based on this, he would save Rs. 30,000 – Rs. 40,000 in taxes paid annually. By contrast, he pays out Rs. 1,22,400 in excess to the bank towards the mortgage which is his own money that can be neither reclaimed nor saved/invested.

Back to the big picture: He intended to pay back the loan by 10 years. So, let’s look at his loan outstandings and tax savings side by side for the entire loan period with his liabilities at 10 years from now.

Amount paid out towards interest Amount saved in tax during that period
10 years

23,40,136 40,000 x 10 = 4,00, 000
15 years 19,74,907 40,000 x 15 = 6,00, 000
Total interest 4315043 (43 lakhs) 10,00,000 (10 lakhs)

There is no contest between the two. When compared to how much he is making the bank rich and what a paltry “tax savings” he is making, the man needs to pay off his home loan pronto and make better judicious use of his own money the way he feels fit.

To do this, he ought to increase his EMI payments by Rs. 12,000. By this he will close his home loan by 10 years(*). Classic opportunity cost scenario, for now he’s not able to save for his son’s education corpus fund! If on the other hand he sticks with the Rs. 8000 investment per month in equities towards son’s education corpus and moves Rs. 5000 into the EMI re-payments, the repayment window extends to 14½ years instead. He kills two birds in one stone. Son’s education as well as home loan: SORTED!

(*) Only if he had started paying 12,000 right at the beginning of the loan term. If he’s already into the loan by a few years, then it won’t be 10 years but somewhat different. I don’t know how far into the loan term he’s into now.

Going further

  • If he keeps up a 12,000 payment for his housing loan as discussed earlier, the loan amount might be closed by 10 years. That leaves Rs. 2000 per monthtowards his son’s fund
  • A 10% increase in salary every year is too optimistic IMO and his household expenses will be increasing as the members start ageing. So, I factored a 5% increase in salary and a 5% increase in expenses and re-worked the numbers.
  • From the increase in salary, the man can increase his monthly contribution to his son’s fund by 2000, 4000, 6000, 8000 and 9000 by years 2, 3, 4, 5 and 6 respectively, and hold it steady from then on.
  • He would have approximately, Rs. 2000, 4000, 7000, 10000, 13000 to invest into his pension from years 6, 7, 8, 9, 10 respectively. If he holds this payment steadily into equities, he will actually be able to reach his target of ~1.1 crores at the end of 58 years of age.

Conclusion

Since he has pre-paid the housing loan, from the 11th year onwards, he will have an additional surplus of nearly Rs. 50,000 per month (which excludes the payments mentioned above!). Even if his salary stagnates (a very likely possibility) and even if returns from the market is not exactly 12%, he will still be able to meet his financial commitments along with son’s education and retirement corpus. If he wishes to still undertake that ‘foreign trip’ of his, he could look at investing this Rs. 50,000 in equities for a period of 3 years at 12% pa, earning himself 20 lakhs and then take that trip. His son might also better remember the trip at this age.

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28 Responses

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  1. Hello Surio

    Plan, well-laid out. I hope the guy gets to read this too along with the Businessline suggestions. I agree about the pre-closure of the home loan ASAP. And I recommend a home-loan only to those who really dont have a single “roof-over-the-head”. This comes in handy post-retirement or when one has acheived FI, whichever is earlier. With rental prices sky-rocketing (LIKE EVERYTHING ELSE) it is one less cost to worry about especially at 65!

    While we are on the topic of home loans, here is my experience on what the the bustling metro/cosmo/ city has to offer for wanna-be “home” prospectors. For one, water is drying out at an enormously fast rate. The enormous depths to which borewells are being drilled to find water suggests that at some point, we may actually find oil in the middle of the city!! Which means, bigger the project, think again!. Think of all the tankers that would be needed to get drinking water unless one wants to “taste” treated water, ROed (Reverse Ozzmosis) , ofcourse !! Two, everything about the city is expensive (including basic transportation). Three, there is absolutely no chance for an innocent childhood -where kids can ride bicycles, play cricket (I have done it and am alive to tell the story), be off to the nearest grocery store (part of the natural social development …). And I believe this is a serious point. Four, there is no social life (And I am not referring to the weekend rave parties and getaways and …). I am referring to the weekdays! So my suggestion is unless one has been born and brought up in the city, purchase of land is best restricted to city (town or village) of origin. Well, thats just me …

    Sathio

    Sathio

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    • @Sathio,
      Good to finally have you on board at last.

      Agreed on the general sentiment “With rental prices sky-rocketing (LIKE EVERYTHING ELSE)”. :-(

      As such, there is no “real” need or demand for housing in the way it is depicted in India. It is speculation, *driven* by “scarcity marketing” and *sustained* by black money. Most of us are consistently being fed a lot of regurgitated jargon from the Western models without necessarily understanding it, or localising it sufficiently even! But the real danger is that, even in the West, it is a very buyer beware market, as can be seen in Ermine’s and Salis Grano’s posts. So there is some consolation there.

      > I recommend a home-loan only to those who really dont have a single “roof-over-the-head”
      Yes, but a job migrant has no real need for looking to own a house. Renting is a very viable solution (See Deepak Shenoy’s link my post). So is monevator blog’s argument here.

      As regards to buying (eventually at the FI stage of your life, not before), I would definitely say there is lot of weight in what you allude in the last paragraph. Save up all your life and when you are FI, decide on a fairly natural setting with less urban, carbon intensive footprint and plonk on it. There is also SriRam-Karpagam couple who’ve gone the ‘collective’ route, like those fellows in navadarshanam in Bangalore.

      One can never be sure about trends in housing. For instance, most houses currently inhabited by senior citizens with children living abroad will come back to the market in the next 2 decades and ease housing demand considerably (We do have a huge aged demographic as well). So, assuming that prices will only go up is a big fallacy. I too was suckered into that sadly!

      IMO, you have touched a very important point regarding sustainability of modern urban living! Watch this TED talk => http://www.ted.com/talks/carolyn_steel_how_food_shapes_our_cities.html

      And it is not just urban water depletion: Here’s data on rural aquifers

      http://spectrum.ieee.org/aerospace/satellites/satellites-peer-into-indias

      Peak oil + Peak globalisation = peak urban disenfranchisement!

      It has happened before,

      The Dust Bowl, or the Dirty Thirties, was a period of severe dust storms causing major ecological and agricultural damage to American and Canadian prairie lands from 1930 to 1936 (in some areas until 1940). The phenomenon was caused by severe drought coupled with decades of extensive farming without crop rotation, fallow fields, cover crops or other techniques to prevent wind erosion.
      In many regions, over 75% of the usable topsoil was blown away in the course of the storms from 1930 to 1940, but there was a high degree of variation in the degree to which the land was degraded. Aside from the short-term economic consequences caused by the mass migration of 2.5 million people out of the plains states, there were severe long-term economic consequences.

      ………will happen again.

      Surio

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  2. Surio,

    One other point is the investment in equity. Unless one is sure enough about the fundamental research and accumulates the right portfolio, the stock market investment can be a sticky affair. I would suggest a 60% investment in deposits, NSC, and endowment policies with an average return at about 9.5% and the remaining 40% on a carefully balanced portfolio. I dont recommend leaving this to the fund managers either. Not withstanding my personal experience, I believe 50% of the MFs out there are actually underperforming. With the volatility in the global markets they are all going to play only catch-up.

    Sathio

    Sathio

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  3. I would like to give some comments about the “home ownership” topic. Please note I will be speaking from past experiences and thought processes, not blended into the here and now of the current housing situation. That is my disclaimer. We, as human beings, were once obsessed with owning a home (of our dreams would be nice, but not included here). Our ancestors owned a home, in large part a farm, with a house, buildings, and land. This became the “family farm”. During hard times, this was mortgaged possibly more than once. The property was in a sense an asset. Collateral if you will. However, in most cases the “crops came in” or the money was somehow made, and the mortgage was retired once again.
    The “home” (by every perfect definition) was secure and passed through generations. Owning a home, and paying the taxes on such was common and low risk. We passed this methodology into future generations, albeit the newly purchased homes had to be in proximity to jobs for those leaving the comfort of the farm. (These were the people who had seen “Pariee” and could no longer be “kept down on the farm”. OK, suburban homes dot the landscape now. Time marches on, mortgages are written and satisfied and we rise in homeownership for the most part. We now have a 3 bed/1.5bath/1250 sq ft home dotting the landscape just about everywhere. Builders love it, buyers crave it, and life goes along in pure happiness and all is well. BUT, oh oh. The Freakin’ Jones have built themselves not a shabby 1250 sq ft home, but a friggin’ FOURTEEN HUNDRED sq ft home! The Jones are operating now outside the law of the land and it is raising such eyebrows!!!! Well, says the Cleavers—If the Jones can do it—By the Lord God Harry so can we!!!!!! Builders now react rapidly: “Gee, everyone wants a 1400 or maybe even a 1500 foot home!!! We gotta hire some help!!!!!
    Jump to the current time for one second. Put two and two together and then let’s go back again.
    Now in 1950 with all the returned military and baby having going on, there were whole cities of these 1250 foot homes thrown up in a heartbeat. The GI’s all got jobs at the aircraft plant, and then the appliance factory, and the auto factories, ad infinim. Jobs and houses. Schools and fishing. Bowling on Saturday night. Wow, everyone was sooo happy!!! But, old Jones was calculating his next move. A friggin” two-story, 2000 ft home with a three car garage and —–get this—-a friggin swimming pool!!! Mr Banker was loving it. Nine fricking’ percent!!!!!!! Get some of it!!! We will make loans at NINE percent on these 30 year jobs!!! Daa daa dee dee. The gubbermint got in on it. 1400 sq ft, $500.00 down, 30 years, and 12 percent!!!
    Jones makes his next move. White Greek Piers on the front porch, a sodded lawn, and a THREE THOUSAND FOOT home, and of course a pool the size of a football field. Jones is now paying 14%, making bongo bucks at his job and driving two vehicles and a John Deer lawn tractor. I won’t go on from here as you know the rest of the tale.

    Yes, owning a home and land is a wonderful, comforting, secure arrangement for one and his family. There are ways (or at least were ways) to do it with a 15 year mortgage and whole lotta money down. You own it before you know it!!!! Yours. Your nest. Where, hopefully you want to be. You could have even built it yourself, deriding the contractors and saving like a rat. No Jones next door to bother you.
    Don’t discount the value of owning (emphasis OWNING) your home. Remember you will still need annual tax money. You will get Jury duty off of that as well. You will be a “citizen” of the community. Do it for your family. Do it for the long haul. Just don’t do it only to show off. Jones will take care of that.

    HSpencer

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  4. > invest all of that Rs. 14,000 surplus in equities, earning 12% pa

    Man, I would run, not walk, towards a stock that could sustainably return 12%p.a.
    I take it inflation is still high in India ;)

    I second HSpencer’s angle on owning your home. Don’t overbuy, and pay it down early. My house is small (three bed) compared with that of most of my colleagues. But it was paid down before I was 50. There are no tax breaks on mortgage payments in the UK, unlike in the US and India. The trick is to overpay towards the end – I paid my house down in <20 years, not the 25 the mrotgage was designed for.

    Doing that means I can consider retiring early – I don't need to depend on the vagaries of the stock market to pay rent, and one of my largest monthly expenses was reduced to the maintenance and taxes. I save about 1% of the purchase price towards that, and it works out okay. There is a certain peace of mind you get from owning a house outright. As a financial project it was a disaster, because I bought initially at the top of a boom. But we do not live by money alone :)

    ermine

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  5. Thanks to you ermine, we are on the same page. We spent our money and bought the house, now we own it and not a joint endeavor twixt us and the banker. We sit in our comfy chair and watch it rain out the window.
    We are pleased our roof does not leak, but oh oh have we looked in the attic lately? Or at the water stained ceiling? A new roof bid was $7,500.00. Good thing we have that available in our emergency fund. We then hear a grinding in the heater/AC. The motor is going out, but the system is already 15 years old so no sense putting good money after bad. A new system rings in at $6,475 for the energy compliant one. Yes, we need that one too. Winter is coming on quickly. Our old windows are less than desirable, better get them upgraded at the cost of $300.00 times 14. A new water line? Oh oh. and the property taxes are due October and ten percent late charge on Oct 15?
    BUT, it is ours!!! No landlord to pay for all this repair or tell us we can’t paint the walls rust coloured. And we can post our Beatles landscape sized concert poster on the wall.
    Yes, maintenance is a factor, but freedom is sweet!!!!

    HSpencer

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    • Bee Gees posters, eh, must be getting to be antiques soon ;)

      That 1% or 2% of the house value allocated to taxes and maintenance is the key with an owned home. I have a index-linked savings account which has the amount for the flat roof which has gone 15 years of a 10 yr service life, and the furnace which is 20 years old. It’s one of the advantages of having seen a few years, you can relate to saving for these things before they break down. Plus ERE’s craftsman skills are worth cultivating – I recently changed a zone valve motor for $10 off ebay, as opposed to $60 to replace or $800+ to call a heating engineer who would probably have recommended changing the furnace/boiler :)

      Some people do nothing once they have paid the mortgage, and the house slowly decays around them. A mortgage free house isn’t free accommodation, buts it’s pretty close, and there’s a peace of mind to be had from that!

      ermine

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  6. I am sure Surio will raise an eyebrow at still yet another post from me, but I re-read the above one I did and it read as if I was describing my own situation, which is not the case. As I wrote that one, I was mind mapping which and what could go wrong, and I just simply guess I put myself to the keyboard. No, I do regular maintenance on the HSpencer home. So, that was just a “what if”, and no I don’t have rust coloured walls nor any Beatles posters, or at least I have had none since the 1980’s. ALL my walls are covered with posters of the BeeGees. Gotta love that disco!!!!!

    Cheers

  7. @HSpencer,
    > ancestors owned a home, in large part a farm, with a house, buildings, and land.
    You are discussing a post American independence, point of view, no? Other parts of the World fared very differently ;-) But yes, where there was the farm, there was a sense of wealth and “belonging”.

    The rest of the narrative was an excellent run through memory lane on “property” metamophosis in 300+ words. No seriously it was. Thank you.

    > Yes, owning a home and land is a wonderful, comforting, secure
    > arrangement for one and his family. There are ways (or at least were
    > ways) to do it with a 15 year mortgage and whole lotta money down.
    You’ve nailed the main point. Whole lotta money down! Which is largely forgotten in the melee :-S
    Otherwise your point is valid. Some like the monevator would probably do it was a one-off. I am doing it the had way like ermine. I am not very joyful of our inflation and the reserve bank raising rates all the time. The banks seem very joyed at hiking housing loan rates as well…

    Like ermine emphasises, learning to do odd-job maintenance around the house is a very good skills. But it is largely getting ignored in India due to half-baked knowledge(*) and the short term boom that everyone has seen in the last 2 decades.

    (*) People believe in the “middle-class myth” and throw words such as “marginal cost”, “opportunity cost” withour really internalising the true meaning. Sure, you can parrot the definition, but that doesn’t amount to anything! :-|

    > it read as if I was describing my own situation,
    You are much too sensible for that. ;-)

    Thanks for your input as always. It always lends a more universal persective.

    Surio

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    • > I am not very joyful of our inflation and the reserve bank raising rates all the time. The banks seem very joyed at hiking housing loan rates as well…

      It may not feel like it now, but inflation is your friend, as long as your income keeps up with it.

      FWIW I bought my first house in 1989, and carried that original mortgage term through to discharge 20 years later. If the value of the mortgage stayed the same, the numerical value would be about twice as much, this was a low inflation period in the UK, avg 3.4%

      My Dad bought the house he is in in 1969, I think for about £5000. It wasn’t his first house, but he discharged this mortgage in 1979. His original debt of £5000 would have a numerical value of £16000 ten years later if it was raised with inflation, but of course a mortgage isn’t. However, his wages rose but his debt didn’t. He discharged this mortgage at a younger age than I did, because he had 10 years of average 12.5% p.a. inflation like you have in India. Yes, interest rates were higher for my Dad than for me, but the percentage of his wage the loan was fell away rapidly. Of course you don’t feel that in the first few years when you need it, then in the last few years you have an easy ride.

      So you have the latter part to look forward to, and indeed you may similarly discharge your mortgage at a younger age than me. And I am already unusual in having paid my mortgage < 50 years old.

      ermine

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      • @ermine,
        Completely agree. But I `fess up; I messed up here somewhat. My own father went for a mortgage like the one your father/yourself went for. My father reccomended the same for me too(*). But like the @SG household’s prevailing thoughts in that post “Red Letter day” (attached in first comment of mine) I got carried away with the Euphoria and thought we are still in growth mode and went for a variable rate housing loan — thinking the rates can only come down in the short/mid term, when the interest component is higher and repayment matters… Then came 2008 :-(. The banks have kept on increasing the rates so far…. First to “cool off the overheated markets” during the boom, then they kept it on the steady high rate after the 2008 crisis (with lesser than normal hikes!). Now, it is a case of “taming inflation by hiking rates”… but the rates haven’t come down at all…. I am repaying it as quickly as I can. Well you know, there is an old Indian saying, “A mortar(pestle type) gets pounded on only one side, whereas a drum gets pounded on both sides”. My life feels a little like that drum!

        (*) Pshaw! What does he know about “new economy”, Eh? as it happens in all these cases, one reacts in haste but repents in leisure…….
        So, if I was on a fixed rate like my good ol’ father had said I should, I would not have been so bitter about it maybe. And yes those loans are of a 10 year duration, much like your father’s :-)

        > but inflation is your friend, as long as your income keeps up with it.
        You’ve attached the classic rider statement there, hehe. In India though, income rarely keeps up with inflation :-|
        In India, a large portion of the middle class still love Government jobs because of the policy to provide a “dearness allowance” among other things. The private sector, while apparently shows higher salaries, is much more slower in passing out goodies….

        It might surprise you to know, That golden poster boy of India (IT/ITES industry) is notorious for freezing all salaries and increasing working hours in 2008 (still in place in most if not all companies, the way I hear news from around friends) ……

        I can’t beat Hamlet on this “Something is definitely rotten in the State of affairs of the World”. Makes your latest post even more relevant and meaningful IMO.

        Surio

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      • > if I was on a fixed rate like my good ol’ father had said I should

        I’m actually replying to your reply just below, but didn’t seem to have a way to do that.

        Take heart. Nearly all mortgages in the UK are variable rate, or they are a successtion of 1-3 year fixed. I paid 15% interest in 1992. At the time it was while George Soros was squeezing the Bank of England. These periods do not last for ever, though it feels like it at the time… My Dad had to eat high interest rates in the 1970s because of the inflation then, but his capital was paid down a long way as that peaked, whereas I had just started in ’92

        ermine

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  8. @ermine,
    Like Spence, your comments from Blighty also lends to the universality of the early mortgage repayment. Thanks for adding your thoughts.

    > I would run, not walk, towards a stock that could sustainably return 12%p.a.
    As you sussed it correctly, inflation is still pathetic here. And the bugbear of all nations, the lorry mafia has gone on strike to protest against diesel prices…

    http://ibnlive.in.com/news/plea-to-lorry-owners-to-end-stir/176919-60-116.html

    I have some fond memories of witnessing this one in Blightly:

    http://en.wikipedia.org/wiki/Fuel_protests_in_the_United_Kingdom

    As such diesel prices are artificially pegged low in India and the only people taking advantage of it are urban diesel cars/suv owners. Personally, I feel diesel ought to priced in the same range as petrol. But I am a minority. As an aside, I notice with some dismay that our traditional spelling of “lorry” has been replaced with the American “truck” in all internet articles. I found only one site above that used the word “lorry”. :-o

    > There are no tax breaks on mortgage payments in the UK, unlike in the US and India
    As you can see from the calculations above, it really doesn’t tantamount to much. It is one of those psychological balms that keeps people in good spirits.

    > The trick is to overpay towards the end
    In India, the bulk of the montly installment is taken towards outstanding interest, and if you overpay in the beginning, the amount is taken towards the principal. This in turn reduces your loan amount thereby brining down the interest component, thereby bringing down the time period. The earlier the better for India’s high rate of interest, right? Or have I omitted something here?

    Totally agree on learning maintenance skills though. Times, they’re a changing here too. Labour is not cheap; only people are yet to realise it. As Dominguez put it in his book, most Indians today “thank their lucky stars that there’s two incomes coming in to maintain all those expenses” just like those American living through Reagonomics did when that book was written :-|!

    Surio

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    • You are entirely right that paying down in th early years does most change, particularly when there is a high interest rate. My mother taught me this as a child, and indeed my Dad, who started off working in a glass factory did just that, paying down early. Your description of the percentage capital repayment to interest I was shown when I was still in primary school, though as an intellectual exercise. You must remember, however, that you are only allocated so many years on earth, so it is a balance. You are hopefully too you to feel the resonance of this :)

      However, the economics of your mortgage is not the only thing in life :) in the early days you are establishing yourself, you may have children who are a source of joy but not necessirly an ease on paying down the mortgage. Some friends I know paid down their mortgate in 5 years. It took me 20, which is still a lot better than 25… 10 years s perhaps too short, oe must live too.

      > “thank their lucky stars that there’s two incomes coming in to maintain all those expenses”

      I never had this, for one reason or another, so I stood or fell on my own resources. Each to their own, this is a difficult circle to square…

      ermine

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  9. While people like us can write on blogs and feel rich and emancipated, the Gini coefficient for India has consistently risen in the two decades and hasn’t fallen over time like what Simon Kuznets saidin his books. Personally I don’t think IT is going to be the “across the board’ income leveller as is regularly touted. Again I am the minority.

    In this scenario, having a home/place that you “own” without worrying about eviction does play a big role in people’s mind.

    But they don’t exactly own the house until they paid it off completely.

    Also @Sathio pointed to an important time-bomb. Maintenance of modern homes (which are mostly high-rise apartment complexes) is becoming a major part of the monthly household expenditure. For example most apartment complexes have to transport their water from elsewhere (mostly rural aquifers) which ends of as a double whammy by depriving crops off water and leading to higher prices for food. As such I hold a dim view of the future and these daily observations don’t do much help either!

    Hooo Boy!

    Surio

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    • > For example most apartment complexes have to transport their water from elsewhere (mostly rural aquifers) which ends of as a double whammy by depriving crops off water and leading to higher prices for food.

      Just how much water do you draw? in a quarter we irrigate far more on the farm that we use as a couple, though of course on the farm we are supplying 25 couples in the csa :)

      And in the UK we are an island with less than 100 miles from the sea in any point, so rainfall is a much higher proportionof our hydrological cycle.

      ermine

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      • Good question. This is tricky because I haven’t really made a back of the envelope calculation yet. I might write a brief post once I finalise the numbers. Here’s some observations. In my own apartment complex there’s a reverse osmosis plant that’s supposed to soften groundwater which has been drawn so deep it is HARD as hell. Even with the plant, the water is so hard we get the salt deposits on every part of the sink/floor washbasin etc…. and no cleaning agent is removing the dull, crusty salt deposit from the floors/sink/clothes/etc… I have decided to resort to washing soda to see if that can remove some of the salt.

        In another apartment complex I lived few years ago, every day there was at least 5-6 water lorries that would bring water for daily consumption! And there are several 100s of them like mine in all cities (Tier-I and Tier-II) that do the same thing day-in, day-out. @Sathio’s present apartment complex have introduced water rationing — cut off water supply during the day (12 PM till 5PM).

        On top of that, the several crore numbers of 19 litre polycarbonate water-cooler bottles that are indiscriminately used both in houses as well as offices all over India every day as well. These outfits are backyard outfits that run under the radar and tap precious water….. and this is the same the World over… Lake Michigan (and rest of the world)

        A general Wikipedia article on water and sanitation here in India. Here’s one recent article that provides highlights on rural+urban water exploitation in my own backyard: The Politics of Water, and an older report.

        > in a quarter we irrigate far more on the farm
        I agree…. It’s the same here too and I suspect, everywhere else too, but is it the correct way?
        Should we not be looking at more empiric studies such as Rice intensification than keep propping up the so-called “peer-reviewed” nonsense(*).

        (*)I was/am a product of Western education style “peer-review”. It is a mostly a well-orchestrated sham most of the time. It may work, but the costs are simply too late. I think Mrs. Ermine and yourself nailed it with the “JFDI” acronym!

        > in the UK [……] so rainfall is a much higher proportionof our hydrological cycle.
        I’ve always maintained what a blessing rain is to your country, and was looked like a barmy fool, but Water is life, and most people seem to go wild over the Sun!

        Surio

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  10. @Surio

    I know I have already spent my nickle on this topic, but I had a thought that is quite valid in the USA. You may or not believe or agree, but I have tested and learned it is true. This one is going to flatten you for a millisecond:

    There are some/many/quite a few/several people now in their 30’s or 40’s and beyond in the USA who have NO CLUE as to the workings of a home mortgage. These people are unaware that hearing a “fixed rate” on their loan means it is compounded monthly. They, therefore think getting a 5% rate is equivalent to “5% of the money borrowed over the life of the loan”. Hard to fathom I know, but sorrowfully it is true. Our American schools do not teach this—anywhere I can find. They have no idea the 5% is really 5% of the unpaid balance of the loan EACH MONTH!!!

    Quite a sorry state for the American public (some of them anyway), but the mortgage companies love it, and in loan closings, they “quietly” mention this fact of compounded interest. The sheep and the wolves, if you will.
    (Not to worry, I am not waxing conspiracy on you again).

    Herb

    HSpencer

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  11. Being mortgage-free is one of the most liberating experiences – not only the sense of owning your home, but also the freedom from the grind of providing that monthly big wadge of cash. With that burden gone, it can open up many other possibilities and I’m sure the reduction in stress is also good for your health.

    Quite agree with Herb about the ruinous effect of financial illiteracy, people really do not grasp the concept of compound interest and lifetime costs. The one that got me most in recent years was all those folks who saw the interest rates come down due to the financial crisis, and deciding ‘wow, we have more money to spend every month…’ and then proceeded to fritter it away on frivolous gimcracks and baubles and consumer piffle. My response was first to instruct the bank to keep my payments the same and stop tracking down with the rates, thank you very much. I reckoned I’d been paying so much all along, I won’t feel any difference if it continues, but the equity gets bought back quicker. My second response was to spend hours drawing up a spreadsheet to model the mortgage through to the end and try out various ‘scenarios’. End result was that with an extra £50 a month, my total mortgage costs would be reduced by nearly a year’s full wage. Just think, an extra year’s wages in my pocket instead of the bank’s! I’m sure if more people thought in those terms they’d have resisted the urge to splurge the money they were ‘saving’ from their mortgage payments.

    I can empathise with worries about flat roofs – I’ve had bit of an issue with my garage roof for a while. Now with the spare time freed up by not working to feed the mortgage, I got around to fixing it. Myself. It’s not that hard, maybe it could have looked a little neater if I’d paid someone to do it, but it would have cost a month’s wages and I’d have learnt nothing. Should be good for another 15-20 years at least (it was about 25years old from the original build).

    @surio – re water stains — try a little white vinegar, supposed to be good for water marks ;-) I doubt sodium hydroxide would do much good.

    Yes, we are blessed with rain in the UK – most years anyway, though I do believe ermine’s in the driest county in England. I’d hate to be dependent on a depleting aquifer, such as the Ogallala in the Great Plains, some scary stories coming out of that area. As you say, water is life, and we’re not good at looking after it.

    Macs

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    • reverse osmosis seems to imply that the problem is desalination, rather than limescale (Calcium carbonate). I didn’t realise that groundwater could become saline, but it squares with the over-extraction.

      Not sure washing soda would help with that, or vinegar to remove the salt deposits, thought it works a treat on regular limescale. Our water in Suffolk is hard water, but a regular ion-exchange water softener works well for that. Although you add salt to the machine, the sodium is switched with the calcium in the ion exchange process, so the softened water has sodium carbonate. This makes it taste ever so slightly sweet to me.

      ermine

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  12. @Macs

    Another oversight with some people is the “refinance” on their mortgage every time the interest rate changes and the bank will agree to “refi” them. They do not realize that they are in many cases restarting the clock. It is more cost effective to go with the higher rate they now have, and enjoy the time and principal they have paid so far. For a young couple doing the refinancing of their mortgage time and time again, it is financial suicide.
    They are going to be 60 years old and still owe about 10-15 years on the mortgage due to the restarts.
    I think the best wedding gift would be a hand held calculator and lessons on how to use it!!!

    HSpencer

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  13. @Spence,
    Compound Interest. That most mis-understood, and mis-used thing of the World today. I agree with your point; it is not very understood either by Americans or most people anyway. On top of that, there is the “refinance” which is an even more insidious. And the sad part is, it is people who do this to other people….

    I grok people. I am people… so now I can say it in people talk. I’ve found out why people laugh. They laugh because it hurts so much… because it’s the only thing that’ll make it stop hurting.

    — Robert Heinlein, Stranger in a strange land (soon after Mike sees an older monkey assault a juvenile monkey)

    Contradictorily I also agree with the “Fool me twice, shame on me” (someone else said it funnier than I could)

    Don’t know if one has to laugh or cry at your joke on hand-held calculators…. No, wait, you were serious there! Oh dear! :-|

    Surio

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  14. @ermine,
    Sorry about the confusion due to my omitting ion-exchange from the discussion. There is an ion-exchange pre-treatment that takes place *before* the RO process happens. So, things ARE PRETTY BAD here as you’ve said so in as many words.

    Surio

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  15. @Macs,
    > the reduction in stress is also good for your health.
    Agree 100%. As a Type-A personality, I’ve had health issues due to stress at work, so it does drive you down if one’ not careful.

    Thanks for pointing to the importance of running “scenarios” with your housing loan repayments. Honestly, in this day and age when most people can get a spreadsheet on the PC for free, there is really no excuse not to learn!!

    Good heads-up on vinegar. I might be tempted to give it a try. DW has pointed to it on several occasions, but I have resisted because of the very strong smell it leaves behind… (and no, salt and vinegar was definitely one acquired taste that I did not manage to acquire despite my long and fruitful innings in the UK ;-) )

    Surio

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  16. @Surio

    This was an excellent topic for your blog and thanks for your posting. I took to heart your reference to Wikipedia re: Serfdom of many parts of the world. I may at times have blinders on and think only in the American realm. Yes, our USA capitalist society here is different in many ways.
    We do share in common however, the dreaded “Central Bankers”.

    Cheers and look forward to your further postings.

    HSpencer

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    • @Spence,
      The post plus the comments coming from you all folks from different parts of the world, lends a unique tapestry to my blog anyway. In that sense, I really welcome all the thoughtful comments a lot. The post itself gets subsumed into the discussion as the comments grow. I actually realise that is what Jacob means when he says, “Read the post, but pay attention to the comments, that’s where the action is” :-).

      It’s good to have you around.

      Surio

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  17. @ermine,
    Thanks for leaving those words of encouragement for me, for it means a lot to me in understanding that the pinch of the shoe may be bad, but isn’t that bad :-)

    Surio

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  18. Investing in stocks for having foreing trip could be risky. Instead one can invest in mid-cap mutual funds or small cap funds which can help to grow your money @ 12% per annum. This is what I have seen in Indian financial markets in last 4-5 years.

    Suresh

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