A loan when properly managed is one of the biggest realisers of your dream. When it is about a financial goal as considerably as purchasing a home, a home loan option is an instrument that benefits numerous people. However, there are various individuals who have the funds to purchase a home without the need for a loan. They often witness a dilemma if they exhaust their savings to buy a property and avoid the debt or avail a loan in place. There is zero one-size kinds of fit for all. For instance, the major determinant of home loan rate in the case of a fixed rate is MCLR and this determinant can be distinct for different lenders i.e., Bank of Baroda MCLR rate may not be the same as HDFC bank MCLR rate and the same is true for other lenders. As an outcome, the home loan interest rate may be different for all lenders.
This said lack of funds is not the only reason why many opt for a home loan. This financing option comes with various advantages to lure aspiring homeowners. Home loan is the cheapest borrowing instruments, which comes with a low-interest rate. Unlike other credit options, there is no prepayment penalty on the home loan with a floating rate of interest. So, there are definitely a few benefits to availing the loan route.
What are the tax benefits offered under the home loan option?
A home loan possibly is the biggest tax saving option, thanks to the tax deductions that is available as per Section 80 C, 24 b, 80 EEA. Together, you as a home loan borrower can avail an overall tax deduction of as high as Rs 5 lakh wherein Rs 1.50 lakh is on principal constituent as per Section 80 C and Rs 2 lakh on loan interest constituent as per Section 24 b plus Rs 1.50 lakh on the loan interest constituent as per Section 80 EEA if you meet the eligibility parameter. All of this lowers your tax liability considerably.
Opportunity for fund growth
Even if you hold the capability to purchase a home through your own investible, you might still require availing a home loan option to save on the taxes. Thus, you can invest your funds to generate an attractive return. For instance, the present rate of interest on a floating interest rate home loan usually begins from 8 per cent per annum based on your loan amount, credit score and repayment tenure. Such record low-interest rates are presently being provided after the Reserve Bank of India’s directive to lenders for linking retail loan interest rates to an external benchmark such as repo rates.
So, on a home loan at an interest rate of 8 per cent, let’s suppose the overall interest amount on your loan would be Rs 3.5 lakh per year and you would exhaust the whole tax deduction available as per Section 80 EEA and Section 24 b. This means, you fall under the 30 per cent income tax slab and can easily save on the tax an amount of Rs 1.05 lakh. Thus, the effective borrowing cost on a home loan may just be 5.6 per cent per annum. You can earn safely between 7.5 per cent and 10 per cent per annum by investing your own funds in distinct instruments. As such, you tend to earn a higher amount of return on your own fund and pay up a lower effective interest rate on a home loan based on the amount of tax you are saving, and the prospect of ROI involved.
When you witness a monetary crunch and are propelled to take up a financing facility such as a personal loan or collateralised loan, it might cost a higher interest constituent than your home loan interest constituent. So, why use up your own funds and live upon the liquidity crunch to purchase a home? Having a good amount of funds in the store would protect you from life’s uncertainties and assist you to meet other crucial financial goals.
Due diligence of the bank’s property
Financial institutions exercise stringent due diligence before funding a project, something that lowers your risk to a higher level. They authenticate the project-linked documents, legal clearances, and title before approving the loan on it. Thus, when you avail a home loan from a financial institution that has already approved the home loan project, it becomes way safer than the unapproved project.
When to purchase a home through own funds
There is zero single answers to the home loan vs. own funds dilemma. Using your fund to purchase a house can be an excellent measure when you are assured that this will not impact your other crucial goals and you would be left with adequate liquidity even post making the payment. Doing this can be a good option for the ones who feel uncomfortable in managing long-term debt.
Home loan tax benefits
To encourage a higher number of people, to purchase their own homes, the Indian government now offers a tax deduction on principal and interest paid on the home loan. You as an individual can claim a tax deduction of as high as Rs 1.50 lakh as per Section 80 C in the financial year. The tax deductions as per income tax are just available post-construction of the home. You cannot claim the tax deduction while the property is being constructed.
Tax benefits on your second home –
In the case of a second home, you qualify to claim a tax deduction for the whole amount of home loan interest paid as per Section 24 b.
Zero prepayment fees –
Unlike other loan options where lenders levy a prepayment penalty on the payment towards a home loan, there is zero prepayment penalty on a floating interest rate home loan. So, when you have surplus funds, you can use it for making the part prepayment of your home loan and reduce your overall burden. However, there would be prepayment fees levied in the scenario of a fixed interest rate home loan.