Buying a house is one of the biggest/most expensive purchases for most of us.
In very rare situations do home buyers purchase a flat by paying the entire amount upfront? Many lack the funds required to make a purchase even as property prices remain stable or fall.
The need for capital to fund their home makes the home buyers opt for home loans for which lenders seek a 20 percent down payment. Arranging this money can be a tough ask for many. Some even consider withdrawing money from their employee provident fund (EPF) accounts for this downpayment.
Is funding your house using EPF a good idea? Let's discuss it
Basics of EPF and withdrawal rules
For beginners, an employee who has been associated with EPF for at least three years and has at least Rs 20,000 account balance is eligible for this. One can withdraw up to 90% of the balance to buy a home subject to other conditions laid out by authorities.
Since the EPFO is going to pay the society or the developer of the property, such withdrawal of money can be used to pay for the entire house — down payment or home loan EMI. You can also avail the interest payment subsidy on Pradhan Mantri Awas Yojana (PMAY) on the payments made through EPF for home buying. Looking at the benefits, this becomes a ‘go to’ option for many salaried individuals when they want to buy their dream home.
Does this make sense from your entire financial planning perspective?
EPF helps salaried individuals to accumulate funds while they are working. The corpus is meant for the period when one retires and there is no regular income. Hence, it is not supposed to be withdrawn before its maturity as this could jeopardize your retirement. By spending your money meant for your retirement today on your home you are exposing yourself to the risk of leaving no funds for your retired life. Remember, no one will give you a loan for your retirement.
EPF is an opportunity to accumulate money for the post-retirement period. You keep contributing a small fraction of your salary to the EPF and your employer matches your contribution. As the salary increases, the contributions do go up. That makes a large corpus in your hand when you retire, provided you do not withdraw it for any other purpose. You let the magic of compounding work for you by investing regularly and consistently in your EPF corpus.
House is a necessity and in the Indian context ‘owned house’ is a social and psychological need for many of us. But short-term thinking’ focussed on immediate gratification must be avoided at any cost.
How to arrange for the downpayment of your house?
It is better to make a plan for home buying. Start saving money to accumulate the down payment amount over three to five years. If the home prices go up or your investments yield less than expected, you may want to delay the home buying by a year or two. Avail of the home loan after you make the down payment but do not touch your EPF money.
Compare the returns
It is better to compare the cost of funds (rate of a home loan) and the rate of return offered on the EPF before taking the funding decision. The repayment of home loan principal and interest both attract tax benefits. Depending on the tax slab of the individual the cost of a home loan stands reduced to the extent of the tax exemption availed. In most cases, the cost of a home loan is lower than the rate of return receivable on the EPF, which makes the home loan better means to pay for your home.
Wealth Cafe Advice- Do not break your one goal to achieve another. Especially when it is the retirement goal. Do not break your EPF for home buying, unless you have other means to secure your retirement.
Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.