Buying a Home? Own Money Vs Bank Loan
If you are buying a home for your own you may feel that own funds may be the best option as loan capital is a burden that you would like to get relieved of at the earliest. But even then, loan capital has its benefits like tax benefits and disbursal of your own funds if any requirement arises. There is one more reason for the home buyers to use borrowed funds is the cost of capital which may be lower than equity. Because of all these reasons the predicament remains whether you should buy your home with your own funds or loan capital. Here we throw some light on the issue to let you take the decision more easily.
Tax Benefits – Section 80 C
Section 80 C of Income Tax Act treats the principal component of the EMI as an investment and the interest component is duly deducted from the taxable income of the assessee under section 24. But the interest on housing loan of a self-occupied house is limited to Rs. 2 lakhs per annum. If the loan is under joint names like you and your spouse, both of you would get a deduction of Rs. 2 lakhs individually reducing the rate of interest. However, there is no ceiling in lieu of interest paid on the home loan for properties which are not self-occupied. This means that the whole of the interest paid is deducted from the taxable income.
Liquidity is Necessary – Tax Savings
Although paying in cash will save you interest but you can get the benefit from tax saving which brings down the rate of interest. At the same time think of the liquidity that you have to part with which can be a great asset for emergency, retirement or any contingency that may arise in the short or long run.
If you have the money to support you in case of contingency and enough funds to buy a house, the right decision is to have a balance between liquidity and credit so that you get the maximum benefit of the tax deduction. At the same time, you will have enough funds too if there is any occurrence of an emergency. This will also save you paying heavy rate of interest on the loan amount and you will also be mitigating the risk of repaying the loan amount for a longer period of time and would have available funds in case you are into troubled times requiring financial help.
Pros & Cons of Mortgage
Although there is a positive psychological effect if you buy your home from your own funds and saved money, it would additionally save you of the paperwork and time that is involved in the loan process along with other costs like processing fees and other allied charges.
Save these benefits, buying your home in cash means a lot of your liquidity will be tied up in one asset leaving a lesser amount of money to be invested in other assets. Frankly speaking, real estate may have returns on investment month on month along with the appreciation of capital value but it has a lower rate of returns compared to investments on stocks and bonds which means there may be a loss if the interests on stocks and bonds outperform the interest on the mortgage.
The Bottom line of Home Purchase
However, whether you would purchase your home in full cash or with a balanced composition of liquidity and credit, or with maximum credit, has financial as well as psychological reasons too. So the decision becomes totally personal but even then this decision should be taken prudently by weighing the pros and cons of the situation and evaluating the financial market.
- Although there is a positive psychological effect if you buy your home from your own funds and saved money, it would additionally save you of the paperwork and time that is involved in the loan process along with other costs like processing fees and other allied charges.
- Although paying in cash will save you interest but you can get the benefit from tax saving which brings down the rate of interest.
- Whether you would purchase your home in full cash or with a balanced composition of liquidity and credit, is a decision which is totally personal but even then, this decision should be taken prudently by weighing the pros and cons of the situation and evaluating the financial market.