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40, and still don't own a home?
Rachna C
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September 14, 2005 09:31 IST

Turned 40?

Threw a big over-the-hill party only to get depressed the next day? And the main cause of this was that you still don't have a house of your own?

Cheer up! Even if realisation of owning your very own home hit you a little later in life, it is not too late.

Stop worrying and get cracking.

For starters, you still have more than a decade of active working life. So don't waste any more time. Get that home now. 

1. Opt for a joint home loan

This way, you will be entitled to a higher loan eligibility amount as well as the tax benefits will apply individually to both applicants.

Generally, home loan companies ensure that your Equated Monthly Installment is not more than 35% to 40% of your net take home.

Of course, if you are earning very well, they could make an exception and give you a higher amount.

Should you club your income with that of your spouse, the amount you are eligible for shoots up.

What's more, both of you can avail of the tax benefits separately.

Home loan benefits fall under Section 80C and Section 24 of the Income Tax Act.

Under Section 80C, the principal repayment you make on your home loan is eligible for income deduction. The limit under Section 80 C is Rs 100,000.

Under Section 24, the maximum amount of interest that can be deducted from your income is Rs 150,000. As a result, your taxable income decreases by that amount.

Interest payment: The maximum limit of Rs 150,000 on interest paid will apply individually to both of you (ie the total deduction will be limited to Rs 300,000).

Principal repayment: The tax benefits on the principal will be shared between the husband and wife. It falls under Section 80C where the limit is Rs 100,000 for each of you.

2. Try and opt for the shortest possible repayment tenure

You end up paying less to the home financier.

Generally, all home loan players insist that your home is cleared when you reach the age of 58 (salaried) or 65 (self-employed).

So, if you have just turned 40, then you have another 18 years to repay your loan. 

Vijaya Bank [Get Quote] is an exception. You are allowed you to repay your loan up to the ripe old age of 70.

The longer the repayment tenure, the smaller the EMI. However, the sooner you repay the loan, the lesser you eventually pay.

The total interest outflow increases with the duration of the home loan.

Loan amount: Rs 30 lakh (Rs 3 million)
Rate of interest: 8% p.a. monthly reducing

Tenure: 15 years
EMI: 28,670
Total outgoings: 51,60,600

Tenure: 10 years
EMI: 36,399
Total outgoings: 43,67,880

By opting for a lower repayment tenure (10 years as against 15 years), you save Rs 792,720. A phenomenal saving by reducing your tenure by five years.

It may make your life a little more uncomfortable but in the long run it will pay off. Specially at this point in your life where saving has to be a priority.

3. Prioritise your debt

If you are thinking of taking a personal loan for a holiday or a car loan, move forward with caution.

Take the home loan and start payments before considering another loan. Only if you can comfortably manage another loan, take it on.

It is advisable that your total debt should never exceed 45% of your net take home. If the home loan touches 40%, then you really don't have much scope for other debt.

Remember, you will also have to look at a downpayment since the home loan company will only pay around 80% to 85% of the cost of the home. Also, there is stamp duty, registration and brokerage to be taken into account.

So prioritise your debt. Keep the home loan as the most important and work out the rest based on the home loan.

You must continue saving even if you are servicing a home loan. Retirement is not that far away and you have to diligently save towards it. If you steep yourself in debt, your retirement funds are going to take a beating.

4. Be cautious when dipping into retirement savings

To cover up the payments you may end up dipping into your provident fund and Public Provident Fund.

A better option would be to sell your shares and mutual fund units. It makes sense to tap into investments to meet your downpayment and other costs.

Tapping into your retirement funds like PPF and PF will seriously affect the lumpsum you expect on maturity.

If you do tap into it, make sure that you balance it later. Either by investing more into the PPF later or ensure that you do some other investments solely for the purpose of benefiting on retirement.

What you can do is that once your EMIs stop, put the same amount into your retirement funds. Let's say your EMI is Rs 12,000. Once your loan is cleared, continue putting this amount into your retirement funds. You would have got used to making this payment so continue. This time, pay yourself. This is assuming that you still have some more years to retirement.

If you are going to be servicing this loan till you retire, then try and save simultaneously. Add a small amount every month to your EMI. If your EMI is Rs 12,000, then make it Rs 14,000 with Rs 2,000 going into your retirement kitty.

That way, you have the discipline of regularly saving for retirement while simultaneously paying for your home loan.

5. Get your loan insured

Get your home loan insured. In the event of something happening to you, the balance loan amount will not be your family's problem.

Home loan insurance takes care of the amount you will owe the home loan financier.

Let's say you took a home loan of Rs 10 lakh (Rs 1 million).

Let's also assume that after you pay up Rs 200,000 of the principal amount, you die. This means, a balance of Rs 800,000 still has to be paid to the home loan company.

This is the amount the insurance company will cough up.

This way, your family is not left without a roof over their head; neither do they have the hassle of paying up the EMI.

ICICI Bank [Get Quote] and ING Vysya offer it free of cost.

IDBI Bank (with Birla Sun Life Insurance Ltd), Corporation Bank [Get Quote] (with LIC [Get Quote]), Union Bank (SBI [Get Quote] Life) and HSBC (with Tata AIG Life Insurance Company) are some players that offer it with a premium.

If your home financier does not offer it, approach a life insurance company and ask them if they will.

But do check the fine print. For instance, for the ICICI Bank loan, the insurance is applicable only if it is death by accident.

6. Opt for a fixed rate loan

Whether to go in for a fixed rate or a floating rate is a matter of personal choice for the consumer.

It is advisable that you opt for a fixed rate home loan.

Over the long term, interest rates will drop. But in the near future, they could rise.

You could even take the fixed option for a few years and the flexible option later. But, there will be a fee for switching over.

If you opt for a flexible loan, you must also have an appetite for risk and be able to take it in your stride when rates rise.

Let's say you opt for a variable interest rate loan. If interest rates rise, you have two options.

Increase the EMI and keep the tenure of the loan constant. Will you be able to financially handle a larger EMI?

Or, keep the EMI constant and increase the tenure of the loan. You really cannot afford this if you are planning on closing the loan near retirement.

If you are financially comfortable with a higher monthly payment and it will not affect your periodic savings, only then go for a flexible rate loan. Or else, stick to the fixed rate option.

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