Most people – particularly the middle class – opt for home loans for buying their dream home. However, should one take a home loan even if one has enough money to buy a house? This query has been bothering many prospective homebuyers for a long time. In fact, the decision to buy a house by taking a home loan or by using extra funds you have would differ for each individual depending on aspects like his financial condition, age, other liabilities, intent of buying a house (investment or end-use) etc.
Some of the pros of buying a house without using a home loan include – a) cost of the house is less as you are not paying any interest, b) no hassle of going through bank paper work for the loan, c) peace of mind as no worry of paying EMIs.
On the other hand, some of the cons of not taking home are – a) no tax benefits, b) a big sum of your savings is locked in one investment, c) by taking a home loan you could have purchased a bigger house or a house at a better location, and d) you are sacrificing your liquidity.
“No doubt that by buying a house without a home loan, the overall cost of the house would be much lower. On an average if you take a home loan for a 20-year tenure, you are paying close to 130% more compared to the actual value of the house when the purchase was made. So not only is the house owner paying a lot more for the house, he also has an added liability of paying EMIs for so many years. But one should keep in mind that purchasing a house by making upfront payment should not be done at the cost of tempering one’s retirement or emergency fund,” says Ganesh Vasudevan, CEO, Indiaproperty.com.
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Some other benefits of taking a home loan should also be kept in mind. For instance, for a self-occupied property funded by a home loan, you can claim a maximum of Rs 1.5-lakh deduction under Section 80C of the Income Tax Act. You can also claim a deduction on the interest component of your home loan EMI, for a maximum of Rs 2 lakh. These provisions make home loans the most effective tax-saving instruments you can have in your portfolio. There’s no other instrument that can assure a similar quantum of tax savings.
Moreover, when you repay your home loan in a timely manner, you boost your own credit score. With an impressive credit score and a history of timely repayment, your creditworthiness increases, making it easier for you to apply for loans and credit cards.
Home loans are also considered to be one of the cheapest forms of debts. Also, real estate investments have historically given lower returns compared to other forms of investments like stocks and bonds. So, if someone has enough funds to buy a house, then in most of the cases a big portion of his savings would get locked in one asset, leaving little scope to diversify his investment portfolio. Even though you can liquidate the property investment by selling it in case you need funds in the future, but you should keep in mind that property sales take time. Quick property sales mostly give less returns compared to a planned property sale.
“The common investing wisdom is that you should not put all your eggs in one basket. Even if you have the financial capacity to buy property without a loan, you should make a careful assessment of how this money will be best used. Even buying property has risks which need to be evaluated. And despite property being an attractive investment for a variety of reasons, there will be avenues that can get you higher long-term returns,” says Adhil Shetty, CEO, Bankbazaar.com.
Therefore, you may want to split your corpus between property purchase and other attractive investment options, and use a home loan to complete the purchase.
So, “if someone has enough funds available so that even after investing a big chunk in a house his liquidity won’t get affected, he should opt for buying a home without a home loan. But if you are planning to do the same by cutting into your retirement or emergency funds, then taking a home loan is a better option. Before making any decision, it is critical to access your financial position and long-term investment strategies,” suggests Vasudevan.