The year was 2000. My husband and I were staring at the question that haunts most newly-weds. What should our new home be? Rented or own? A rented house seemed like the choice of nomads, moving from one locality to another every 11 months. But buying was frightfully expensive. Home loan interest was 13.5 per cent and the cost of a reasonable house was more than three times our combined annual income. We had to figure how to make the decision.
The first question we asked was how EMIs compared with rent. If the rent took away 20 per cent of our income, the EMI would take 40 per cent. We would be all right with this, provided we took no more large loans until we paid off the home loan. If we bought a house, our monthly outgo on EMI would leave us with much less to spend or save elsewhere. But we were also confident that our salary would go up over time, while the EMI stayed constant, giving us some headroom. We decided to cut back expenses, take on additional assignments to augment income, and ensure that our loans never crossed 40 per cent of income.
The second question we asked was about the benefits from the house. It would not generate any rental income since we lived there, but it would provide an indirect benefit in the form of tax savings. Up to Rs. 1,50,000 per year could be claimed as deduction for interest paid on a home loan. If we took a joint loan in both our names, both my husband and I could claim the benefit — a cool saving of Rs. 3,00,000 on taxes every year. The EMI is mostly made up of interest in the initial period, making it possible to claim the maximum benefit. Thus, instead of paying Rs. 20,000 per month as rent, we would pay an EMI of Rs. 45,000 on the Rs. 35 lakh loan. But the Rs. 3 lakh saved on tax meant that our net outgo was almost the same as the rent, but we would own our home. It suddenly began to make more sense.
The third question was about how owning the house would affect our lives. We would have a child soon, and that would mean more expenses. We may not live in the same city, but go where our jobs took us. It would make no sense if every decision we took in the future had to consider the house and the loan. The value of property was only going up, and we had to take a loan to buy it anyway. We would take a long time to save enough to buy a house without a loan. We needed to protect the income, which meant I would continue to work. As for the house, the trick was to not overdo it. We, therefore, settled for a 1.5 bedroom house in the suburbs, and we did not decorate it as if we would live there forever.
Thirteen years later, I am happy to report that we did right. We have paid off the home loan. We have booked a newer and bigger second house, but the same principles work. Secure the income; keep EMI to less than 40 per cent of income, and ensure that the tax benefit is maximised. In that same, strict order.