To be able to repay the amount for so long, you must assess and review all aspects of your finances and then decide whether you can afford to take a loan or not. You need to take into consideration your future flow of income, whether you have enough savings to meet any emergency expense.
Let us look at some of the advantages and disadvantages of home loan.
Advantages of Home Loan
- Makes buying a home affordable for all The home loan makes it easier for an average middle-class salaried person to afford buying a home of their own. The lenders in India sanction or reject the home loan application based on the credit score of the applicant as well as their capability to repay the amount.
If you receive an income regularly and have the capacity to repay the EMIs (equated monthly instalment), the lenders will quickly approve the application. Additionally, the home loans have a long tenure, typically it ranges from 15-20 years, which means the EMI is smaller and more affordable. So, by availing a loan, you can enjoy the happiness of being a homeowner.
- A cost-effective way of availing credit One of the major home loan loans benefits is that it comes with a lower interest rate than other forms of borrowing like a personal loan or a gold loan. This is because the lender uses the property that you wish to purchase as a security against the amount you borrow.
Home loans interest rates are the lowest among other types of loans, although the interest ranges from lender to lender, it usually hovers between 8% to 12%. Make sure that you choose a lender that is offering the loan at the best interest rate; even a slight difference in the interest rate could save you thousands of Rupees in the long run.
- Capital growth Over the past decades, the cost of the real estate properties in India has been on the rise consistently. Many experts suggest that the capital appreciation of the real estate properties has been much higher than the interest you pay on the home loan.
- Compulsory way of saving If you are wondering whether a home loan is good or bad, you must know that it has both sides. It is just up to you how you deal with it. When you have cash in hand, it can be challenging to resist the temptation of spending. If you are confident that you will have a steady stream of income but are unable to save any money, then taking a home loan is the best way to have saving.
For example, if you have availed a loan of Ten lakh rupees at the interest rate of 10 per cent and if the value of the property increases even by 20% by the end of the loan period, then the capital appreciation will be higher than the interest you pay. The appreciation of capital will help you take care of the expenses and yet gain profit on the sale of the property.
The money you pay towards the EMI, you can look at it as a saving rather than an expenditure. This is because after you repay the loan completely, you will become the owner of the house, which will have an increased value at the end of the loan tenure.
- Guarantees safety of the property Buying a home is once a lifetime expense, and you would surely want to ensure that the property you invest in is free of any legal issues. This is where availing a home loan can be a great boon. When you approach a lender for a housing loan, the lender will do a full background check of the credibility of the builder as well as the property itself. They will review the paper associated with the property and ensure that the building is legal and that the builder has obtained all the clearance certificates from the local authorities.
Also, the lender will ensure that the property is not involved in any legal disputes. So, with the lender taking care of the paperwork, you need not go through the tedious process yourself, and if the lender approves the loan, you can be sure that the property you wish you buy is safe.
- Increases the loan eligibility When your home loan is in effect, and as you continue to repay the amount diligently or if you have already repaid the loan in full, your CIBIL (Credit Information Bureau (India) Limited) score will automatically increase, and the lenders will classify you as a safe and responsible borrower. This will help you improve your loan eligibility. You can use this to advantage and avail loan at a more affordable interest rate.
- Tax benefits This is another significant benefit of availing a home loan. If you mortgaged property against a loan, you could claim a tax deduction on the principal as well as the interest part of the repayment. For the repayment of the principal component of the home loan, you can claim a deduction under Section 80C. The maximum limit for deduction in this regard is Rs. 1.5 lakhs.
For the repayment of the interest component, you can claim a deduction under Section 24B. The maximum deduction you can claim for the interest repayment is Rs. 2 lakhs. These deductions can be a massive amount in terms of calculating your overall annual tax obligation. If you buy a house without a loan, you will miss out on these tax benefit on home loan.
Disadvantages of Home Loan
- It is a big commitment Once the lender approves your home loan application, you are making a huge commitment for a long period. The typical duration of a home loan last between 10 to 30 years. This means that you would have a debt for a significant amount of time in your life. Once the loan is in effect, you would have to be prepared to control your expenses and focus on the repayment.
- Home loan may carry risks The duration of the home loan typically spans over 10 to 30 years, which is quite a long time. During this period, several unforeseen circumstances can occur. Some of these instances can make it difficult for you to repay the loan.
Events like divorce, sudden illness, loss of job, accident, can put in a tremendous financial turmoil and affect your ability to cope with the burden of the loan, which in turn can result in the loss of the property. In case, if you fail the repay the loan, the lender has the authority to take over the property and sell it to gain back the money they lent you as a home loan.
- Loss of investment opportunity This is one of the most overlooked disadvantages of home loan. When you apply for a loan, irrespective of big or small the loan amount is or how long or short the duration is, as you continue to repay the amount, you lose the opportunity to invest the same amount in an investment tool that could yield you valuable returns. Imagine, instead of paying the EMIs, if you could use the amount to invest in mutual funds or in a fixed deposit, you would get valuable returns in the long run.
- Loss of tax benefit on the HRA component The employers pay housing Rent Allowance or HRA to the employees as part of their salary. The HRA allows the employees to claim a tax deduction for the rent they pay for the housing. To claim the HRA tax benefit, you must meet the following requirements:
- You must stay in a rented house in the city of employment and own a home in a different city.
- Your house is under construction or is under re-development, and you have rented a house until the construction work is completed.
Thus, if you are living in your own house, you lose the opportunity to claim the HRA exemption and the entire amount will be considered as a taxable income.
Learn more about your home loan eligibility here.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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