ARTI ARORA CFP CM | HEAD FINANCIAL PLANNER
House purchase is a goal that is common to every one of us. The nature & size of the goal may vary from one individual to another as per their specific situation & needs.
It is also a big decision in anyone's life, aspiration wise as well as in terms of financial outlay involved. It thus becomes even more pertinent to plan for it in terms of the initial cash down as well as the ongoing loan commitment.
So, it only makes obvious sense to plan for something as big as this. How do you do that? Is it enough to have saved enough amount for the cash down? Or should one also account for the EMIs one will be bound to pay with the purchase? Should one also see if this EMI can be adjusted in one’s overall cash flow situation or would it mean cutting down on some existing expenses?
All of the above get clearly answered when you follow a process or stick to a financial planning approach that shall give you the holistic view of your finances and enable you take a sound financial decision.
First & foremost, be clear of the total purchase value for your house. As a thumb rule, you can take loan up to 80-85% of the total value and the balance 15-20% has to be paid cash down. When you know the purchase value, this can be easily worked out and altered in line with your specifics.
Second, having figured out the cash down you are comfortable to make, the balance amount needs to be converted to EMI that you will have to bear which will have a direct impact on your cash flow situation & vice versa too.
Third, having figured out the above, the next is the course or duration of the loan. Being loan or debt free is the ultimate objective but should not be driven by desperation but by objectivity. There are some broad points to be kept in mind while deciding to pre pay the home loan which are as follows -
- If the return you are making on your investments more than the interest cost you are paying out on your home loan? While doing this comparison, it is important to know that the EMI is calculated by compounding interest on monthly basis and so the actual interest cost is only higher than the home loan interest rate. So, if the return you are making is more than the cost you are paying, it is better to continue with loan as is.
- If the interest you are paying is more than the return you are making on your investments, it only makes sense to keep prepaying the loan at regular intervals and keep the loan amount as well as the loan term in check.
- While doing the above comparison, the tax benefits that a home loan brings about too should not be ignored. Section 80C deduction for principal repayment and section 24 deduction for interest payment on home loan are great cost savers in terms of tax saving and this is why ‘home loan’ is slated to be a good debt.
- Last but not the least, your cash flow situation, portfolio holding as well as your important financial goals all have a bearing on your financial life and must be taken into account while making any financial decision.
In India, there is a lot of pride with having our own house and why not, it's a dream to behold. Achieve all your dreams through prudent planning & proper understanding of all the important constituents of your financial life that have been explained above.