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How to include your property with a home loan in your portfolio?

This article shows the right way of valuing your property with a home loan for your investment portfolio.

How to include your property with a home loan in your portfolio?


Posted on 09 Aug 2023
Author: Sayan Sircar
9 mins read
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This article shows the right way of valuing your property with a home loan for your investment portfolio.

How to include your property with a home loan in your portfolio?

📚 Topics covered:

This article is the second part of valuing real-estate relative to your investment portfolio. You can read the first part here: How much real estate should you hold in your portfolio?.

Reader query on property with home loan

The property that I own is worth 60 lakhs. And the outstanding home loan amount is 20 lakhs. How to include this in my portfolio?

To answer this reader question, we must first understand how paying down a home loan builds an asset, i.e. equity in your home.

Mortgage payment vs home equity

The bank gives a home loan to own the property while you use it until you pay back the loan via EMIs. An Equated Monthly Instalment plan (EMI) is a standard way to pay off a loan by making a fixed payment monthly that has both interest and principal in the same amount.

EMI = Principal + Interest

In each EMI, the split of the interest and principal changes since the interest is based on the outstanding loan balance at that point and the rest of the EMI is principal. As the chart shows, the interest part drops off with time, and the rest is the principal. The actual numbers in the chart relate to a ₹50 lakhs home loan taken at 8% for 25 years. The EMI is ₹38,591. The down payment amount is ₹12.5 lakhs.

You can test the numbers using this calculator:

As you pay back the loan, your ownership share in the house will increase in the same way. At the point of taking the loan, you own 20% of the house (12.5 out of 62.5 of which 50 is the loan). The bank owns 80%. As the loan is repaid, you own more and more of the house as the principal is paid off. This is the concept of building equity in an asset. Equity is the part of the asset you own after subtracting the part that the bank owns.

Home equity value = Current home value - Outstanding loan balance

Once you build equity in your home, that has additional benefits:

  • you can take a top-up loan in case you need money for some other purpose like home improvement, or any other reason
  • the more you will get to keep if you sell the house

Two approaches to adding a property with a loan to the portfolio

Let’s recap the question:

The property that I own is worth 60 lakhs. And the outstanding home loan amount is 20 lakhs. How to include this in my portfolio?

We can follow one of two approaches here:

  • include only the equity portion of the property in the portfolio. In this case, it is ₹40 lakhs to be added to the portfolio as an asset
  • include the entire market value of the property and then add the home loan EMI payments as goals. We follow the same approach explained here: Goal-based investing: how to purchase your dream home

We use the Arthgyaan Goal-based investing calculator to formulate the investment model with all the above assumptions and goals. There is a link to download a pre-filled copy of the Google sheet via the button below.

Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.

Once you get your sheet, you can get access to video tutorials in the howto tab.

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

Case 1: Include only equity in the asset section

Home equity value = Current home value - Outstanding loan balance

In this example, we will enter the house value minus any outstanding loan amount in the assets table. Here, the investor owns a loan-free plot worth ₹20 lakhs and has ₹40 lakhs equity in the house.

Assets tab:

(click to open in a new tab)
Case Study 9 Aug 2023 only equity

Goals tab:

(click to open in a new tab)
Case Study 9 Aug 2023 only equity investment plan

Also read
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Include the loan as a goal

We will do two things:

  • add the total market value of the house to the assets
  • enter the outstanding loan as a liability by entering the EMI payments as financial goals

In our example, we will assume that the house is worth ₹60 lakhs and the outstanding loan is ₹20 lakhs at 9.05% for 10 years. The EMI for this loan is ₹25,000/month or ₹3 lakhs/year.

We will cover two cases:

  • portfolio asset allocation and SIP amount without the property added
  • portfolio asset allocation and SIP amount with the property added

Case 2: Without the property added

Goals tab:

(click to open in a new tab)
Case Study 9 Aug 2023 only loan investment plan

Case 3: With the property added

Home loan tab:

(click to open in a new tab)
Case Study 9 Aug 2023 home value home loan details

We have followed the instructions in the red cell to set the home loan values here per this framework: Goal-based investing: how to purchase your dream home.

Assets tab:

(click to open in a new tab)
Case Study 9 Aug 2023 home value assets and loan

Goals tab:

(click to open in a new tab)
Case Study 9 Aug 2023 home value investment plan

The SIP value is ₹113,078/month, of which the ₹45,231 debt SIP includes the EMI of ₹25,000. The assets total is ₹130.44 lakhs, and the term insurance coverage is ₹3.74 crores. Interestingly, the asset allocation uncovers a problem with the portfolio: insufficient equity allocation. The solution here is to divert the entire ₹113,078 (minus the EMI) into equity until the asset allocation corrects itself.

We summarize the results below:

  • Case 1: Home loan modelled and total house value added in assets: ₹130 lakhs assets, ₹3.74cr insurance needed, EMI included in monthly SIP of ₹113,078, equity required is ₹21 lakhs more
  • Case 2: Home loan modelled and but no house added in assets: ₹70 lakhs assets, ₹4.34cr insurance needed, EMI included in monthly SIP of ₹137,021, equity required is ₹14 lakhs less
  • Case 3: No home loan modelled as a goal and equity value added in assets: ₹110 lakhs assets, ₹3.70cr insurance needed, EMI excluded in monthly SIP of ₹111,444, equity required is ₹22 lakhs more

There is a caveat, though, on the asset allocation. We need to ensure that the asset allocation is correct for all the goals in the portfolio. A quick test to ensure this is to check if the target equity allocation of the portfolio is very close to the current one. A too-low current equity allocation carries the risk of long-term goals not being met.

Which one should you choose?

Every investor needs to calculate their home loan and asset exposure for all the three cases described above and choose the approach where:

  • EMI plus monthly investment is lower
  • equity allocation is correct, mainly

Property without any loan

If your property does not have a home loan, there are two ways of dealing with the situation:

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This post titled How to include your property with a home loan in your portfolio? first appeared on 09 Aug 2023 at https://arthgyaan.com


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