Let us not try to challenge the basics in any way; being a borrower is not easy. There are so many terms and conditions you have to abide by; there are so many dos and don’ts one has to remember. Given a choice, you may never like to seek financial assistance from banks.
Now, what if you have a choice? What if you have enough money to buy a house without taking a home loan? You like a house worth Rs 50 lakh, and you and your wife have enough savings to make the purchase without having to go to a housing finance company. Why should you opt for a life where several restrictions will be thrown your way when you can simply avoid them?
A fair point, indeed, but here are some other points that you must consider before arriving at a decision.
Why Home Loan is Better Than Financing?
1. Liquidity Matters
It may not be a wise idea to pump all your liquid money into an illiquid asset. In case you need cash owing to an emergency in future, you would find it mighty hard to arrange it. Your home may be worth millions but it happens to be an illiquid asset. It may take a long time before you are able to sell it and use the cash received through the transaction. In short, it is never a good idea to invest all your money in immovable assets.
2. Tax Benefits on Home Loans
You enjoy tax deductions on the principal and interest paid against a home loan. In India, a borrower can claim deductions under Section 80C of the Income Tax Act for the repayment of the principal component.
- Principal Deduction: Up to Rs 1.5 lakh under Section 80C.
- Interest Deduction: Up to Rs 2 lakh under Section 24.
- Extra Benefit for First-Time Buyers: Additional Rs 1.5 lakh under Section 80EEA.
- No Tax Benefits on Self-Financing: Buying without a loan means missing these savings.
3. Property Appreciation Covers Loan Costs
The value of the property you have bought using other people’s money — the bank’s in this case — is going to increase as time progresses. That would be enough to make up for the interest you have been paying on the loan. On the other hand, you can invest in another property using the remaining cash, in case you wish to. If you have liquid money lying in your bank account, there is no lack of choice. You would be limiting your options when you put all your money in an illiquid asset.
4. Financial Discipline and Stability
- Encourages Budgeting: A borrower learns to manage finances better to ensure timely loan repayments.
- Reduces Impulse Spending: Without a loan, people are more likely to spend on unnecessary items.
- Long-Term Financial Stability: Managing a loan instills better money habits, reducing reckless expenditures.
- Builds a Responsible Mindset: Loan repayments encourage mindful financial decisions and future planning.
5. Credit Score and Future Borrowing
Gone are the days when people thought highly of you if you could foot all your bills using the money lying in your pocket. We live in a digital age. You are likely to pay less if you use your credit card for making certain payments, for instance. You get certain discounts in certain restaurants, for example, for using a certain kind of credit card. The same is true of ticket bookings—movie, air tickets, etc.
Would it not simply be dumb to let go of all these advantages because you like to depend on your finances alone? How you utilise financial assistance from banks reflects in your credit score; having no record whatsoever would mean you are a poor manager of finance.
Now, how is home purchase and all this co-related? They are, as a matter of fact. We also live in uncertain times and have no idea when the need to knock the doors of a bank might arise. In case we have no credit record, the bank may not find it comfortable lending to us. In case you take a loan to buy your home, you would also be maintaining a good credit history.
Conclusion
While self-financing may seem like an attractive option, a home loan offers multiple advantages. It ensures financial liquidity, provides tax benefits, and even helps you build a strong credit history.
So, think wisely and make an informed decision!
Frequently Asked Questions
1. What are the tax benefits of taking a home loan?
A borrower can claim deductions up to ₹1.5 lakh under Section 80C on the principal repayment and ₹2 lakh under Section 24 on the interest paid.
2. Is it financially safe to take a home loan instead of self-financing?
Yes, a home loan ensures you maintain liquidity, making it easier to manage emergencies without selling your home.
3. Does taking a home loan improve my credit score?
Yes, regular EMI payments contribute to a positive credit history, improving your credit score and future loan eligibility.