It is advisable to opt for a home loan even if you have the money to purchase outright.
While most flat buyers have to take a home loan out of necessity, there are some who have to choose between getting a mortgage or purchasing their new residence outright.
Well, believe it or not, experts recommend taking a home loan even if you have the money available in hand, due to a variety of reasons.
Analysts point out that while paying cash for a property may help avoid paying loan fees and processing charges, if you finance the property later, you will be paying these costs anyway. In many cases, it may be viewed as a refinance and therefore may carry a higher interest rate, higher costs and fees, yet provide you with a lower loan-to-value ratio loan.
There are many investment vehicles that could give you a greater financial yield on the money that you have in hand at present, which would set off the home loan EMIs.
Moreover, it may make sense to use your savings to clear debts like credit card bills or personal loans, which are likely to have higher rates of interest than a property mortgage.
Balance the numbers
Manavjeet Singh, senior president, Retail Banking, Yes Bank, elaborates, “The customer availing a home loan would be eligible to claim tax benefit vis-à-vis going for own funds. Under the option of purchase of property through own funds he needs to take into account the opportunity lost on the interest that he would have earned on money invested elsewhere after accounting the home loan interest rate along with tax benefit he would have got had he taken a home loan.”
According to him, ideally the benefit of availing home loan needs to be clubbed with the interest, which an individual shall earn on own funds, which he does not use to purchase the property. It all boils down to the rate of interest on the home loan, interest earned on own funds, tax bracket under which customer is falling, which is variable and differs from person to person.
Ideally a person should avail of a home loan for the following reasons:
Tax benefits
Tax benefits can be claimed on both the principal and interest components of a home loan. These deductions are available to assessees who have taken a loan to either buy or build a house. Tax benefits on interest component is Rs 1.5 lakh under Section 24(2) and on principal component under section 80C can be claimed on EMI paid in a financial year for fully developed property.
Due diligence
Opting for a home loan ensures the due diligence of the property for which loan is applied. Financial institutions conduct the legal and technical search of the property before disbursing a home loan. Legal opinion and title search is conducted to check history of the property in terms of previous owners and clearance of the property, whereas technical search gives the fair market value of the property. This way the purchaser can be safeguarded on legal clearance of the property purchased.
Credit history
A clear repayment track on the home loan improves ones credit history and hence a good score with credit bureaus. These credit scores are crucial in deciding on a loan proposal for the financial institutions. Good credit scores help in obtaining loan facilities from banks and financial institutions in future.
Topup loans
Given the property is an appreciating asset and the credit history of the applicant significantly improving with the repayment track, the applicant may also have quick and easy access to funds for his business requirements through top-up loans on the existing property as these loans are cross-collateralised,” Manavjeet points out.
Key advantages
Amit Bhatia, director and head - Assets & Business Banking, Deutsche Bank India, explains that home loans are generally available for a longer tenure and lower interest rate than other kind of loans. It would make sense to avail of the home loan even if funds are available in hand due to the following reasons
The funds can be utilised to retire other high cost debt like credit card balances or personal loans
Floating rate home loans do not attract part payment charges or pre-closure charges giving one the flexibility of making payments at any point of time without penalty.
Availing of a home loan helps substantially in planning your taxes; Section 80C offers tax rebate on home loan principal up to a limit of Rs 1 lakh and Section 24 on interest up to a limit of Rs 1.5 lakh.
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