How Can EPF be Helpful in Buying Your Dream Home?

Buying a dream home is a goal that everyone sets for themselves. If you are closer to your retirement, then you may feel the urgency to arrange for funds to buy your home. However, arranging for the funds to pay for home purchase can be an uphill task. For salaried individuals, the Employees Provident Fund Organization (EPFO) provides the option of using 90% of their EPF or Employee’s Provident Fund (EPF) to purchase a house.

The most important thing that you need to ask yourself is if you want to use the entire amount to invest in a property or if you want to improve your Home Loan eligibility with the extra funds available.

What is an EPF?

An Employee’s Provident Fund or EPF is a retirement benefit that is available to salaried individuals. This is a scheme that is regulated by the EPFO of India. By law, any organization that has over 20 employees must register for EPF.

How does EPF work?

When you begin to work, 12% of the basic salary is contributed from an employee to the EPF account. Out of the 12%, 3.67% goes into your EPF account from the employer and the remaining 8.33% is diverted into an EPS or an Employee Pension Fund. If the base salary is Rs. 6,500 or below, only 8.33% is deducted.

This amount is pooled into a fund that generates an interest of 8% to12% as decided by the central board of trustees. Currently, the interest rate is 8.75%.

Even when you change your job, the EPS information remains the same and the amount continues to be contributed by your new employer into the same account.

EPF for buying property

Currently, you have the provision to use 90% of this EPF fund to purchase or construct a new home. You can either use this money to make the full payment towards the property, pay the down payment or EMI towards your ICICI Bank Home Loan or other housing loan option from the EPF account.

While this scheme makes it easier for you to buy a new home, whether you should use the funds solely for this purpose or not is still a question to ask yourself. Investing 90% of your retirement benefits towards a property means that you will have lesser funds at your disposal when you actually retire.

How to use EPF to buy a home?

Using the EPF for property purchase should be a calculated decision. It is never advised to solely use the 90% of your retirement benefits available to buy or construct property. The advantage of this provision is that it improves your Home Loan eligibility and helps you make payments towards your home in EMIs.

The first thing that you need to keep in mind is the amount available in your EPF account. If it is on the higher side, say a few lakhs and you have at least 10 years before you retire, using the reserved amount to purchase your property is advised. Even then, avoid using the entire amount for the same.

If you find that 70% of the funds available are sufficient for you to invest in the property, you must only use about 20-30% and look for a good Home Loan deal like ICICI Home Loan to pay for the rest. That way the unused amount will continue to accumulate and you can still enjoy a comfortable life after you retire in addition to having your own home.

On the other hand, if you are able to pay the entire value of your property with just 20-30% of your EPF, then you may consider avoiding a loan. This will save on the interest that you will pay towards a Home Loan.

The best option available to customers is to use a combination of a portion of your EPF and a Home Loan offer. You can also use the EPF as security towards a home loan that you avail and divert funds towards the home loan from the EPF account.

A combination of EPF and Home Loan gives you one big advantage, you are able to save quite a bit on the interest that you pay. For instance, if your property is worth Rs. 20 Lakhs, using the EPF to make the down payment and obtaining a loan for Rs. 20 Lakhs means that you will be paying a higher interest rate.

On the other hand, if you use the EPF to make the down payment and pay a portion of the property value, you can obtain a loan of a lower amount, say Rs. 15 – 16 Lakhs. Considering that most home loan offers are available with an interest rate of about 9%, you will be making considerable savings on the interest towards Home Loans.

In addition to this, getting a Home Loan also allows you several tax benefits. You can use the interest that you earn on the EPF funds to save on interest repayment on an annual basis towards your Home Loan as well.

Who should use EPF to purchase property?

The following individuals may use EPF to fund the purchase of a new home:

  • Those who will have a considerable bulk of the EPF remaining even after investing in the property.
  • Those who have at least 10 years of service left and make a decent contribution towards EPF each month.
  • Those who have additional savings available to fund for their expenses post retirement.

Advantages of using EPF to buy a home

  • You can use the EPF funds to reduce the interest paid towards a loan or not pay any interest at all.
  • It helps you arrange for additional funds that you need to buy or construct a home.

Disadvantages of using EPF to buy a home

  • Your retirement corpus is used for the expensive proposition of buying or purchasing a home.
  • You will have little or no funds available to fund your expenses after you have retired from service.