Think before you leap

The attractiveness of home loans has increased a few notches now. As interest on home loans is deducted from your taxable income, it is now possible to end up paying zero tax if your taxable income falls below Rs 1 lakh after deducting the interest.

Given that interest rates on home loans are threatening to head higher, the motivation to secure a home loan in the next few months would only have been boosted. Before you rush headlong into a home loan, care however needs to be taken on two counts.

One, you have to carefully recalculate your monthly cash outflows and find out if the bargain will work for you. Two, you are now taking the risk of putting all your eggs in a basket. Failure to consider the relevant factors in both cases can leave you in a worse position a few years from now.

Constraints in cash flows: If you are earning Rs 2.5 lakh in a year, saving about Rs 1.1 lakh in tax-saving instruments and still paying tax of about Rs 30,000, then securing a home loan of about Rs 15 lakh can ensure that you pay no taxes. This is because the interest from home loans will reduce your taxable income to less than Rs 1 lakh.

So, what would be your incremental cash outflow? A 15-year loan for 20 years at an interest rate of 7.75 per cent will require annual payments of about Rs 1,50,000. Now, you are saving Rs 1.1 lakh per annum. If you are also paying a house rent of about Rs 65,000 per annum then going for the home loan will leave you with excess cash.

Or, will it? Of the Rs 1.1 lakh saved, there will be some committed savings that you cannot avoid. Provident fund deductions and payments to a pension plan are a few such examples. If your annual provident fund deduction is about Rs 18,000 and if pension plan accounts for Rs 10,000, reduction in savings would be Rs 82,000 for a year. Still, going for the home loan would not require you to fork out extra cash.

If the committed savings involve also life insurance policies and/or unit-linked plans, you will have a smaller surplus from your salary to take care of home loan payments.

Securing a home for Rs 15 lakh or Rs 17 lakh will require you to move to suburbs due to affordability issues. Moving to the suburbs usually brings in additional expenditure. If this expenditure were about Rs 36,000 on a yearly basis, then it could affect your monthly cash flows significantly.

Margin of safety: Do these caveats mean you should abandon your search for a home? Of course not. Acquiring a home now is as attractive as it could ever be. You will only have to plan better. You must build in a margin of safety in your monthly cash flows.

You must also ensure that the price at which you buy the property or apartment is not way out of line with market prices. This way you will understand the risks better and prepare better for them, although you cannot cut out risks entirely.