Financing your home – should you take a home loan or make cash payment?

Financing your home – should you take a home loan or make cash payment?

Becoming a property owner is a major financial decision. It is a decision that should be taken after carefully considering various factors. Essentially, there are two ways in which one can go about with purchasing a home – by taking out a home loan or by paying the entire amount of the property in full. If you do have enough funds, you may not find the need to take on a debt and pay extra sums in the form of interest, and rightly so. Despite this, most people prefer to take on a home loan owing to the various reasons. So we decided to compare the benefits of home loan vs cash payment and find out the better option.

Lock-in of funds: Purchasing a property is a huge investment; one in which you end up locking-in a huge sum of money. Experts believe that even if you have the sums to purchase the property in one go, it is better to take a home loan. Instead of spending a lump sum amount on the property, it is better to go for a large amount down-payment and pay off the remaining amount in higher amount, monthly EMIs, since you can afford it. This way, you do not have to worry about high interest rates or tenures and you can still afford the loan. Moreover, you can use your remaining sums for other kinds of investments instead of putting all your eggs in a single basket. You can get better return on investment if you invest in stocks, mutual funds or bonds instead of investing all your sums in real estate. This way you can diversify your investment portfolio and optimize returns as well.

Extra money always comes in handy: Whether you decide to take home loan or pay cash, you must remember to have some cash available for financial emergencies. A financial emergency can crop up any-time – you could require medical treatment or lose a job, which could possibly affect your cash in-flow. Instead of spending all the money in a single real estate investment, you should keep an emergency fund. You could also use the amount to build your retirement corpus. Having an emergency fund can come in handy during the most trying financial circumstances, including paying home loan EMIs during stressful financial periods. As such, it is better to take a home loan instead of spending all your savings in one investment alone.

Taking a loan can improve your credit worthiness: Did you know that your credit scores can reduce even if you do not take on any loans? This is another point of debate with regards to home loan vs cash payment in India. A loan can help with building as well as improving your credit scores. Each time you pay off your loan EMI on time, your credit scores begin to improve. This further works in your favour when you need to take on a loan in future, including credit card applications.

You can consider better property options: When you choose to pay money upfront for a property, you generally have to stick to the budget you have on hand. As a result, you may end up compromising on your dream house. Your budget can end up restricting the kind of property you can buy. Instead, it is better to make a home loan cash down payment. This allows you to go beyond your budget and consider better property options. You can use the sums on hand as down payment and invest in a better property in a better locality, which can later help you earn better returns on investment.

Tax benefits: Another point of debate between home loan vs cash payment is tax benefits. If you are repaying a home loan, you become eligible for deductions of up-to ?150,000 per annum on the principal loan repayment amount as per Section 80C of the Income tax Act. You can get a further deduction of ?200,000 on your home loan interest amount, if you or your family are using the loaned property as your residence.

Final thoughts: A home loan is the cheapest kind of debt in India. Banks and HFCs offer very attractive home loan interest rates, with tenure lasting up to 30 years. When you are confused whether to take home loan or pay cash in India, remember the above mentioned points and take an informed decision.