The most significant realizer in our dreams is a loan, when handled properly. And in order to accomplish a vital life goal, like purchasing a home, a home loan is a blessing for innumerable citizens. Many of us, however, have money to buy a home without the need for a loan. They are often faced with a query. Should they spend on buying a property to prevent debt or instead take a loan?
Lack of funds is not the only reason people take a home loan. A variety of incentives are given to prospective homeowners through this funding facility. One of the cheapest debt instruments with a low interest rate is a home loan. In comparison to other loans, housing loans with floating interest rates have no advance payment penalty. Therefore, the loan path undoubtedly provides certain advantages. You can check out a home loan EMI calculator online for further information.
- Home loan tax advantages
Due to a range of tax cuts offered under Sections 24, 80C and 80EEA of the Income Tax Act, a home loan is perhaps the greatest tool to save tax. Together the borrower can assert the total tax deduction of up to Rs 5 lakh (Rs 1.5 lakh for main reimbursement pursuant to Section 80C + Rs 2 lakh on loan interest in Section 24 + Rs 1.5 lakh on the loan interest part pursuant to Section 80EEA) that may help him reduce his tax liability by Rs 1.5 lakh if it falls short of 30% of the tax liability pursuant to Section 80EEA.
- Opportunity of growing your fund
You may want to make use of a housing credit facility to save on taxes even though you are willing to purchase a home from your own fund. You can then invest your money to produce an attractive profit. In line with the RBI directive, these record low rates are currently offered to lenders to connect retail credit rates to an external benchmark such as the repo rate.
If you take loan at a rate of 8%, let us conclude that your home loan’s gross interest rate is Rs 3.5 lakh per year and that you can wind up the full deduction available under Section 24 and Section 80EEA. In other words, you can save up to Rs 1.05 lakh when you fall under the 30% tax bracket. Thus, it will just be 5.6 percent p.a. to borrow your home credit. 7.5 percent -10 percent p.a. is healthy to earn. Investing in different securities with your own assets. As such, depending on your investments in tax and your ROI prospect, you will earn higher returns on your own bank and pay lower effective interest rates on your home loan.
- Liquidity Benefit
In the case of a cash crisis and a credit facility such as a personal loan or the collateral loan, the interest rate will be much higher than the level for a home loan. Then why do you use your own funds to purchase a home and survive in a cash crunch? Your savings will shield you from risks in your life and help you achieve other essential financial objectives.
- Due diligence of property by bank
Before funding a project, banks apply strict proper diligence, which reduces the risk to a high level. Before authorizing the loan, they check the project papers, their title and legal approval. So it is better than a non-approved project if you take home loans from the Bank that has approved the projects already.
Conclusion
The “own funds vs. home loan” question has no concrete solution. If you are completely confident you wouldn’t have an effect on other important financial targets, you could take your own fund to buy a house and have enough liquidity even after you have paid for it. Here even those who are unable to handle long-term debt could have a viable option. Given the importance of a home loan, it is important to keep the aforementioned factors in mind.
