Owning a home is almost every Indian’s dream. To some, it gives a sense of security. To others, it brings a sense of success and accomplishment. Whatever it maybe, one must understand that buying a home is a life-changing decision, especially when it comes to finances. In India, real estate prices increase nine out of 10 times. Buying a home is the most impactful financial decision a family makes in their lifetime. Quite naturally, most buyers turn to avail of home loans to help fund their dream home. A housing loan comes with several benefits that help buyers prosper in the future. This article will cover both the pros and cons of a home loan.
Advantages of a Home Loan
A Long-term Appreciating Asset
Going by data provided by the Bank of International Settlements (BIS), property rates have appreciated uninterruptedly through the last decade. Given that more than one-third of India’s population is young and most young people aspire to own a home, most financial experts believe that Indian property prices are expected to appreciate further in the future. So, purchasing a new home is one of the smartest decisions you can make right now.
Home Loan Tax Benefits
A loan typically entails home loan tax benefit. Section 24 of the ITA or the Income Tax Act suggests that a homeowner can claim up to Rs. 2 lakh as a deduction on housing loan interest. However, the property must be self-occupied. If the borrower rents out the same property, interest exemption happens on whichever is lower from the following — a) cumulative interest that has been paid for all properties owned by the taxpayer
b) Rs. 2 lakh. Besides, per section 80C of the ITA, a borrower can claim Rs. 1, 50,000/- as a deduction on the principal repaid.
No Lock-in of Funds
It is no secret that a house in India is an expensive buy. Even if you do have the money to buy a home without a home loan, it is not advisable to do so. Emergencies can happen at any time. It hurts if a significant amount of cash gets locked up in the real estate market.
While a house is a great investment, it is difficult to liquidate it on short notice. You also need to remember that a home does not allow the same kind of returns as mutual funds or stocks. Extra cash indicates that you can diversify investments even while you are keeping them liquid.
Improves Credit Worthiness and Credit Score
Paying home loan EMI can enhance your creditworthiness and increase your credit score. If you maintain a good record on your housing loan, it is likely to be easier for you to finance a car loan or a kid’s student loan.
Lowest Cost Debt to Create an Asset
In India, the rate of interest on a home loan is typically cheaper than any other loan. It is also easy to avail of a home loan as it is generally secured against an asset. A home loan is also the most cost-effective way to fund a long-term asset.
Disadvantages of a Home Loan
Impact on the Property Cost
When you avail of a home loan, the cost of the property increases. Not, however, in the literal sense. To understand this, look at the following example. Let us assume that you bought an apartment in Kochi for Rs.55 Lakh in 2015. For the same property, you availed of a housing loan of Rs.45 Lakh. In 2020, you wanted to sell off the apartment at Rs.75 Lakh. This would indicate a profit of Rs.20 Lakh in four years, which is about 8% y-o-y appreciation. However, you will not be making huge profits. This is because the interest you have already paid on your home loan over the last five years would be more than Rs. 20 Lakh.
It Is a Long-term Commitment
Another con is that a home loan goes on for several years. On average, a home loan usually lasts for at least 10-12 years. Unless there is a significant hike in one’s salary, a home loan EMI will necessarily impact the finances. Due to unforeseen situations, if you are not able to pay your home loan EMIs, you will become a defaulter. This will impact your credit score.
Changing Home Loan Interest Rates in India
Any increase in home loan interest rate leads to higher interest components.
In business economics, opportunity cost indicates a benefit, profit, or value of something that ought to be given up to achieve or acquire something else. Over the past few years, the Indian real estate market has experienced significantly lower returns as compared to other classes of asset investment. Since home loans are typically for a longer tenor, it is an opportunity lost.
These are some of the pros and cons of housing loans. Consider these carefully before you avail of a home loan. Also, remember to check out your housing loan eligibility and how profitable the housing loan interest rate is with the help of a home loan interest rate calculator. These will help you make the most of your housing loan.