We all dream to own a comfortable house. However, the costs of houses are skyrocketing. Consequently, banks and NBFCs offer different types of home loan to make your dream become a reality. Though the aversion towards high-interest debt makes people consider self-funding a better option to explore. As a matter of fact, if you are stuck in deciding home loan or own funds which is a better option; let’s find out!
Home Loan or Own Funds: Which is better?
There is no rule or logic to say which one is better. In other words, there are certain factors that are to be considered while making the decision. Whether to go for a Home Loan or buy a house or use own funds depend on the individual. Most importantly, you need to consider his/her age, financial condition, the objective of buying a house (investment or self-use), existing liabilities, and many more.
Home Loan or Own Funds: Things to Consider
- Work out your interest income
- Calculate the total interest on your home loan
- Estimate the tax benefit that you can enjoy on your taxable income
- Calculate the net benefit of taking the loan
To help you decide if it is better to take a home loan or pay cash let’s discuss the pros and cons.
Home Loan: Pros
Firstly, you do not need to break your savings to buy a house. Furthermore, if you belong to the middle-class or lower-income segment and willing to buy a property and continue enjoying interest on your savings; home loan is the best option for you. To put in simple words, in case the interest earned on deposits is higher than the interest paid on home loan, go for home loan.
Tax Benefit is one of the biggest reasons why people prefer a home loan to buy a house. As an applicant you may claim a deduction of up to Rs 1,50,000 on the principal amount paid. Furthermore, you can get up to Rs 2 lakhs on interest paid under Section 80-C of the Income Tax Act.
While you are repaying the EMIs on time you are actually boosting credit score. With on-time payments and good credit score, your creditworthiness perks up.
Liquidity is something we cannot ignore. As a homebuyer if you invest all your savings on purchasing a house you are undeniably sacrificing your liquidity. This can put in you in trouble in case of any urgent financial crisis.
Own Funds: Pros
You do not have to shell out anything as financing costs to anyone. Banks and NBFCs charge Processing fees, administrative loans, switch fees and so on.
As you avail a Home Loan to buy a house you actually pay much higher amount than what you availed. Moreover, Housing loam is a long-term commitment; you are stuck for a long period. However, you may keep yourself out of these hassles if you choose self-funding as an option.
This is a hassle-free process. The homebuyer need not have to wait for loan approval and disbursal. The process necessitates less documentation as well.
To Sum up
If you can self-fund a house without affecting your liquidity, have around 15-20 yrs service period left’ you may choose to buy a home without a home loan. However, if you find you need to burn out your savings and retirement corpus, go for a loan to buy a house. Hey! It’s time to rethink!
This blog intends to list down some of the pros and cons of availing Home Loan and self-funding.
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