Don’t let multiple loans restrict you

Purchasing a second house on loan will restrict your ability to invest to achieve other goals

My wife and I (32 years old) work in the software industry. We have a son (4 years old) and a daughter (2 years old). We purchased a house about five years ago. We have been making prepayments on the housing loan; the current outstanding is ₹25.5 lakh. The EMI is ₹42,000 per month. Our monthly expense, including loan EMIs, is about ₹90,000. We can save about ₹65,000 per month.

1. Should we purchase another house for rental income?

2. We have not made any investments till date. We have about ₹1.5 lakh in savings bank accounts and about ₹4 lakh in bank fixed deposits. Our combined EPF balance is about ₹9.5 lakh. Our combined monthly EPF savings including employer contribution is about ₹27,000.

3. We want to invest for our retirement, purchase of another house and our children’s education and weddings. We need ₹15 lakh each for their education and ₹10 lakh each for their weddings. We are not sure about how much we need for retirement.

4. We want to purchase a car immediately. The car will cost us about ₹6 lakh.

5. We have already purchased a life cover of ₹1 crore for both of us. We have also purchased a family floater of ₹10 lakh. This is in addition to the covers from our employers. We also have accidental disability insurance that cover us for ₹25 lakh each.

You have just purchased a house. The bulk of your savings have been diverted towards prepayment of the housing loan. It is a fine decision since you have been able to bring down your home loan to a more manageable level. Now is the time to add growth assets to your portfolios. Purchasing another house on loan will crowd your ability to invest for other goals.

Loan burden

Therefore, it is advised that you stay away from purchasing another house at least till such time your existing home loan is paid off. Additionally, you must understand that rental yields in residential real estate are not very high. Unless you are looking for capital appreciation, you can get higher returns in a bank fixed deposit.

Coming to your goals, you must first build up an emergency buffer. This corpus will come in handy in case of a financial or a medical emergency. Since both of you are working, you can do with about six months of expenses in fixed deposits or liquid funds.

You can target about ₹6 lakh for your emergency corpus. You can earmark ₹3 lakh from your fixed deposits towards this. To bridge the deficit, you can start an SIP of ₹10,000 per month in a liquid fund. You will accumulate the requisite amount in about two years. You must note that in case of use, this corpus needs to be replenished.

You want to purchase a car immediately. Since you do not have enough funds to purchase the car outright, you have to take a loan. You can use your FD of ₹1 lakh for the down-payment and take a loan of ₹5 lakh for five years. The EMI for this loan will be about ₹10,500.

You can invest the remaining savings (₹65,000 – ₹10,000 - ₹10,500 = ₹44,500) for your other goals.

For the kids’ education, you need to invest about ₹19,500 per month, considering an inflation of 6 per cent p.a. in the education cost and a return of 10 per cent on your portfolio.

You will need the funds for your son’s and daughter’s education in 13 and 15 years, respectively. You can invest the amount in hybrid equity funds by way of SIPs. As you move closer to the goals, you can start shifting the money towards debt funds.

For the children’s weddings, you need to invest about ₹7,500 per month, considering an inflation of 6 per cent and return of 10 per cent p.a. on your investment. Invest this amount in a mid-cap fund.

The remaining amount (₹17,500) can be invested towards retirement. A rough estimate is to save an amount equivalent to 30 years’ expenses. By the time you retire, the EMIs for various loans would have been knocked off and the children will likely be well-settled. After removing these expenses, your monthly expenses are about ₹40,000 per month. That works out to ₹1.44 crore (30 years’ expenses). We need to consider inflation, too. At 8 per cent, the equivalent amount will be about ₹12.4 crore. Assuming a return of 8 per cent on the existing EPF corpus, you need to invest about ₹68,000 per month. A sum of ₹27,000 is already going to EPF each month. You can invest the remaining ₹17,500 in equity funds (assuming an average return of 10 per cent p.a.) — ₹8,500 in a large-cap fund, and ₹4,500 each in a mid- and a small-cap fund.

You are investing less than what you need to to reach your target retirement corpus. However, your investment ability will increase when the home loan gets paid off. At the current rate, the home loan will be repaid in seven years.

Moreover, you can increase your investments when your salaries and the monthly surplus grow over a period of time.

The writer is founder, PersonalFinancePlan.in

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