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Am I too young to take a home loan?

Uma Shashikant | August 08, 2005

Got a question about your money? What you should or should not do with it?

Our expert Uma Shashikant has the answers.

I am 25 years old, single and working for the past three years. Every month, I manage to save Rs 20,000.

Do you think I am too young to be buying a home?

What I have figured is that a monthly rent of Rs 5,000 will only amount to a few lakh (Rs 10 lakh = Rs 1 million) in the next 20 years.

But, purchasing a house right now will bring a burden of around 40 lakh (Rs 4 million) over the next 20 years.

There is tremendous sense in your thinking. It is a good idea to build a home after you have managed to keep some money aside as savings. There could be unexpected expenses and you will be hamstrung by a large Equated Monthly Installment (the amount you pay every month towards your loan).

Continue to save and pay the rent.

In any case, it is wise to keep EMIs and loan payments of all kinds below 40% of your monthly take home income. Any amount higher than that would cut into your normal spend, as well as emergencies.

When you do go for a loan, ensure that it fits into your budget comfortably.

Having said that, the amount that you have deduced – Rs 40 lakh - is way too high.

If you like the idea of converting the rent that you are now paying into the EMI of your housing loan, you can do a simple computation to get a ball park estimate.

Multiply the rent by a factor of 1 plus your tax percent to know what your EMI is. The loan that comes with such an EMI is where your breakeven point is.

Let's work it out.

Monthly Rent = Rs 5,000
Rent over 20 years = Rs 12 lakh (Rs 1.2 million)
Tax rate = 20%

Equivalent EMI = Rent x (1+tax rate)
= 5,000 x 1 + (20/100)
= 5,000 x 1 + 0.2
= 5,000 x 1.2
= 6,000

Equivalent EMI = Rs 6,000

At an EMI of Rs 6,000, you should get a 10-year loan of around Rs 7,50,000 (at 8% per annum).

Even if you paid all that you save today (Rs 20,000) as EMI, you would get a loan of Rs 25,00,000 (at 8% per annum) for 20 years.

Clearly your Rs 40 lakh computation is way above!

Don't forget the tax benefits you get on a home loan!

I am 26 and single. I earn Rs 20,000 a month and my monthly expenses are only Rs 10,000. I have even managed to save Rs 1,00,000.

My family wants me to get married. But I am not sure if it is the right time to do so. I would like to save some more before I tie the knot.

Since I live in a joint family with two elder brothers who are married, I would also like to buy a house.

What are you views?

- Subhan Mohammed

When to marry is a very personal decision.

Take a realistic look at your earnings, and your expenses and how they can increase once you are married. Also consider whether or not your wife will be employed.

You would then be able to take this call.

I would think that you should use the time and money you have on hands to further sharpen your skills. Not only will this enhance your career prospects but you will be in a position to earn better in the long run.

If there is additional qualification you can acquire, this is the ideal time to do it.

Take a look at the answer above on taking a home loan.

I am 24 years old and have an income of Rs 8,000 per month. Since I live with my parents, my monthly expenses are just Rs 2,500.

The bad news first: I have a loan of Rs 2,00,000.

The good news: My parents gifted me Rs 6,50,000.

Here is my question. Should I pay off my loan or invest the money? I am comfortably paying off my loan as of date.

- Terry Joev

Invest what your parents have given you for the long term. Don't draw on it.

It would be a good idea to use part of your gift to pay off your loan. Because the interest rate that you are paying on your loan will be higher than what you can earn.

However, if you think you will end up spending the rest of your salary, you are better off paying the loan every month. That way, you make it a habit to spend less.

Perhaps, the solution lies in asking how you incurred the Rs 2,00,000 loan in the first place.

Illustration: Dominic Xavier

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