The Hindu Business Line : Home loan: Will swapping help?

My elder daughter is doing final year engineering and she may get married in another three years. My younger daughter is in IX standard and she wants to study bio-technology in Singapore.

My family is living in my own house, which is five years old, with my parents, who enjoy good health.

I am paying an EMI of Rs 28,700 on a home loan of Rs 30 lakh with a tenure of 15 years (currently the interest cost is around 12.5 per cent). I have repaid the principal to the tune of Rs 5 lakh.

I am staying in a rented accommodation as my work place and native place are far away from each other.

Can I plan to reduce my tenure? As the housing finance company has not increased the EMI, the tenure has gone up in the past few years. This is the first year I am staying away from my native place. Can I claim HRA deduction?

For my elder daughter’s marriage I may need Rs 9 lakh. I am short of Rs 4 lakh. I recently closed my savings in debt instruments and purchased large- and mid-cap stocks worth Rs 5 lakh.

I am planning to use this money for my younger daughter’s higher education, which is likely to cost Rs 20 lakh.

Currently, my gross salary is Rs 90,000 p.m. and I am eligible for performance incentive. Based on my current expenses, I can save at least Rs 25,000 a month.

Please suggest an investment plan for both my daughters’ wedding.

My current provident fund accumulation is Rs 12 lakh. I am planning to use this for my retirement. Few of my insurance policies are getting matured in 2011 (the sum assured is Rs 5 lakh).

I may live up to the age of 75 and my current family expenses work out to Rs 25,000 a month, inclusive of my younger daughter’s education.

Please suggest how much I need to save, considering that I am eligible for gratuity.

My wife has some health problems. She may live up to the age of 60 (she is now 40). As I am covered under group medical insurance, all her expenses are taken care of.

I may inherit few acres of plot in kolkatta, which is currently worth around Rs 70 lakh.

Suggest a plan to minimise tax, if my father plans to transfer the property in my name (which I may dispose of, once I receive). — Dave, e-mail

The solution

Home loan

In 2003, interest rates were low. People who failed to lock their loans under the fixed rates would have seen their interest rates go up by more than 4.5 per cent, which may still rise by another 1 per cent.

Under this condition, it’s better to shop around with some of the nationalised banks and if the tenure is less than 10 years, you can look for a loan at the rate of 10.25 per cent.

Existing housing finance companies may charge you a pre-closure penalty of 2 per cent and the cost of processing a new loan might cost you another one per cent. On the whole, you may have to shed 3 per cent or Rs 75,000 to swap the loan. With the recent hike in the CRR and repo rate, there is a strong possibility that your interest cost might increase by at least by 0.5 per cent. By swapping your loan at 10.25 per cent, you will be saving Rs 80,000 an annum and you can also be sure of closing your loan at the age of 55.

But this will come at a price as your EMI will shoot up by another Rs 4,000.

But after adjusting the tax benefit, the net out flow may be close to Rs 3,000.

Regarding your HRA benefit, since your work place is different from your residential town, you are eligible for the same.

Education

For your daughter’s education, we assume you require Rs 5 lakh every year from the start of 2012 for the next four years.

Your current investment of Rs 5 lakh in equity will grow to Rs 7.8 lakh in the next four years, if it grows at 12 per cent. You will be still short of Rs 12 lakh. If you contribute a sum of Rs 12,000 every month, you can reach the target in 72 months, provided it earns you 12 per cent.

Marriage

Since your elder daughter’s marriage is just three years away, it is advisable to accumulate at least 70-75 per cent in debt and the rest in equity. If you allot Rs 10,000 a month for next three years, then you can comfortably achieve the target. As several banks offer recurring deposits that fetch 9.5 per cent for 3 years, use this route to invest.

As a tax saving measure, invest in your daughter’s name and at maturity the proceed will be taxed based on her income slab.

The rest can be routed through the mutual fund or direct investment to equity based on your risk appetite.

Since these investments consume your entire surplus, it is advisable to plan for your younger daughter’s marriage, once the other goals are achieved. You may have more surpluses once your elder daughter starts earning.

Inheritance

If your father intends to transfer the property, it is advisable to divide the plot between you and your wife to reduce capital gains.

If you are planning to sell immediately after the transfer, it would be better if your father sells the property and gives you the money as a gift. It is an efficient way of tax planning.

Retirement

Your current basic pay structure is not available, hence calculating future PF accumulation is difficult. As you are covered by the provision of Gratuity Act, the maximum benefit will be Rs 3.5 lakh.

Going by your life expectancy, at the time of your retirement, you should have a corpus of Rs 81 lakh to sustain for next 20 years from 2018.

Assuming your monthly contribution to PF is Rs 3,000 a month and it earns an interest of 8.5 per cent for another 10 years, the corpus is likely to be around Rs 6 lakh. Hence you may have to save Rs 60 lakh.

As you are planning to sell your land (at current value of Rs 70 lakh), you are assured of your retirement needs and you can leave an estate to your daughters, provided you plan your investment without much risk. Given that your wife has few health problems, it is advisable to take medical insurance at least five years ahead of your retirement, to protect your corpus.

Queries can be sent to financialplanning@thehindu.co.in

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