Owning a house is a dream for many in the middle class. There are those in the Gen X who did not manage to do so, despite working till the age of retirement.
But the new middle class bread winners, who earn a hefty 5-digit monthly salary are looking to purchase home before or after marriage, while still in their youth.
It’s not a bad idea to own a home, to feel the pride of being a home owner or secure a permanent space for your kids to grow in a good environment . Except don't make your home the biggest liability. This is how you can make the most your home loan .
Limit your home loan to 30 lakhs
The Govt. of India wants you to own a home or in fact multiple homes. It gives tax exemptions for
- Repayment of home loan principal under Sec 80C upto Rs. 1.5 lakh
- Repayment of home loan interest up to Rs. 2 lakh for a self-occupied property. In case of multiple properties, which are given on rent, this limit doesn't apply if you are paying tax on the rental income you receive
So, for an individual to take complete advantage of home loan, he must be paying an interest of Rs 2 lakh interest, in addition to a principal of Rs 1.5 lakh i.e max 3.5 lakh annually. This comes upto Rs 30,000 in equated monthly installments or EMI, which in-turn corresponds to around Rs. 30 lakh, 20 year home loan at current rates.
Note that, most of your repayment in the initial years goes in paying the interest. Those who take home loan are annoyed that despite paying EMI for two or three years, the loan outstanding does not come down much. With time the interest component decreases and the principal component increases. You won't be able to get the complete benefit all the years.
If you have a higher loan, repay the loan partially to reduce the outstanding amount to Rs 30 lakh. Higher loans are only a financial burden.
Take home loan jointly with your earning spouse
All the above benefits are available for joint borrowers of home loan as well. So your spouse can get the benefits if they are co-borrower and share the property ownership. The loan amount will be split as per the ownership ratio, which can be proportionate to the incomes of you and your spouse. Your loan eligibility increases as well, taking it to a maximum of Rs. 60 lakh, therefore allowing you to purchase a big home.
Do an SIP in a good equity mutual fund for 1/5th of the home loan
The average long term returns of Indian equity mutual funds have been around 15% so far. This means, you can get back the entire EMI amount you paid for your home at the end of the term by investing 1/5th of the amount. Say you have a Rs. 20 lakh home loan with a around Rs.20,000 EMI for 20 years. If you invest Rs 4,000 in a SIP, you will get back all the Rs. 48 lakh you paid in EMI at the end of the term loan. Isn't that great? Why does it happen? The difference of 5% between mutual fund returns and home loan interest over 20 years saves you so much money! Read more about this trick in my other post.
Invest in a new property or specified bonds to save tax when you sell property
Say, you purchase a home now and sell it after three years, you attract long term capital gains tax on the profit you make, however, if you purchase another property within a year, you can avoid paying it. You can also invest in specific bonds of NHAI or REC to save on the tax. It’s also prudent to ensure all the transactions take place withing a financial year to minimize paper work and others due to the spread of transactions across multiple financial years. Read more about this in this page or here
I believe home is an expense, and a good thing to own. However, it can work against you if you treat it as you only investment or if you are in the business of selling and buying homes continuously. Spread your investments across multiple classes. Take home loans to make you better off
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Disclaimer: This article for education purposes only and is not an investment advice/financial advice and should not be construed as such. Decisions taken are solely at your own risk. Read disclosures page for more details.