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Is taking home loan beneficial?

23 September, 2022      Home Loans

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Every human being’s dream is to own a home. To fulfill this dream, home loan plays a pivot role. Building your dream home, a home loan is a must these days.

Is taking home loan beneficial?
 

Considering rising prices, buying a home financed by all your money is almost unbearable in the prime cities. However, some people still think taking a home loan has some disadvantages with those high interest rates. So, let’s evaluate what are some of the profits and disadvantages of taking a home loan.

Benefits of a home loan

While one may feel stressed if they have to pay EMIs every month, home loans do carry some significant benefits. Investing in a home is like building an asset which in most cases, appreciate with time thus making Home Loan beneficial in the long run. With this in mind, one can surely console itself.

Home loans makes you a proud homeowner

Yes, that is true. Home loans confirm that you become a homeowner. Given the growing prices of land and construction materials, buying a home on one's own funds is impossible. Instead of taking expensive loan financing, home loans allow you to take funding at a much inexpensive cost and build an asset. When you go for a Home Loan well in advance, the initial glitch of the EMI therein will not only become tolerable but will also feature a sense of attainment when you finally own a Home.

Buying a home is one of the biggest financial investments you may make in your lifetime; and that's not just because of the emotional value. The sum that most of us descend into our home does make it the largest element of our investment portfolio!

Tax benefits for repaying a home loan

There are Tax Benefits on repayment of a Home Loan both on 'Repayment of Principal Amount' and 'Repayment of Interest' on Home Loan.

The interest percentage of the EMI paid for the year can be claimed as a deduction from your total income up to a maximum of Rs 2 lakh. There is also deduction in respect of interest paid towards home loan during pre-construction period. Also, the principal portion of the EMI paid for the year is allowed as a deduction, with the maximum amount allowed for the claim being Rs 1.5 lakh.

Tax Benefit: Interest paid

As per Section 24(b) of the Income Tax Act, 1961 a deduction up to Rs. 1.5 lakh towards the total interest payable on the home loan towards purchase / construction of house property can be appealed while calculating the income from house property.

The interest owed for the pre-acquisition or pre-construction period would be deductible in five equal annual installments beginning from the year in which the house has been acquired or constructed.

Tax Benefit: Principal Repayment

As per the newly introduced Sections 80C read with section 80CCE of the Income Tax Act, 1961 the principal compensation up to Rs. 1 lakh on your home loan will be allowed as a deduction from the gross total income subject to fulfillment of prescribed conditions.

Home loan allows you to save on rent

While many prefer to pay rent without ownership, the fact is having your own home means you do not waste money. Paying rent means economic loss because you do not have any ownership. Plus, renting involves annual rent hikes, which are often higher than inflation. Instead of paying increasing rent, one can easily own the same type of home in 15-20 years. Use home loan EMI calculator to find out your EMI and compare it with the rent.

Leading to value appreciation

Home Loan, as the name suggests, leads you to buy a house, an asset that yields one of the highest appreciation rates. You are not buying something that depreciates in value, the moment it leaves the showroom. So, what are you worried about?

Pradhan Mantri Awas Yojana (PMAY)

This PMAY scheme is applicable only for First Time Home who desire to go for Home Loan. If you are eligible and once your loan amount is sanctioned, you can get an interest rate subsidized.

Inculcating that sense of responsibility

Once your home loan EMI repayment initiates, you regularly keep trail of the payment due date, Bank balance and prioritize them. You thereby develop a sense of accountability in you. Enjoy the unique Home Loan advantages by planning right early.

Capital Appreciation

For each one of us who has seen property prices boom over the last five years, the prospect of mouth-watering capital appreciation is the biggest argument for buying a home. Construction costs alone, which account for more than 70 per cent of the flat's cost, have risen at 15 per cent annually in the past decade. Rents too seem to keep up with inflation; making a home one of the few investments can shield you from inflation for the long term.

Low interest rate

Buying a home is a long-term decision of over a 10-year period; the home loan interest rates may go through several up and down cycles. Therefore, you can be sure that you will benefit from falling rates at some point in the cycle.

There could also be situations in which the interest rates fall, allowing you to prepay your loan and own your home. For instance, those who bought property in 1995, at an interest rate of 18 per cent, not only saw interest rates fall dramatically over the next decade, to bottom out at about 7.5 per cent, property prices too appreciated steeply. This works as a double boost to wealth.

The best way to manage borrowing costs is by actively managing your home loans! That's not as difficult as it is sounds. Banks and home-loan lenders often give new borrowers much better rates than existing borrowers based on their home loan eligibility. During the uptick of the interest rate cycle, if your cost of borrowing increases by more than 2 percentage points, pay 0.5 per cent of the loan outstanding as processing fee (conversion charge) to your lender to gain the rates offered to the new borrowers.

Tax benefits on second house

In case of second house, you are entitled to claim deduction for the entire amount of housing loan interest paid under Section 24B of Income Tax Act.

Although there are many benefits of home loan in long run, there is still a need of deep thought before stepping forward.

Things to keep in mind before taking a home loan

  • While home loans might be a necessity today, that doesn’t mean they are without any disadvantage. Home loans involve long-term responsibilities in terms of repayment. Unlike a personal loan which you can pay off in 1-2 years, a home loan is usually a 10-20 year commitment. This means you have to be enormously controlled and pay the EMIs on time for 120-240 months without any delay.
  • Home loans do not make you 100% owner of the house if you do not pay properly. If you fail to make payments, the financial institution or bank will be free to use all sorts of legal alternative. This, in worst of cases, can lead to you being expelled from the home and the bank taking ownership.
  • Home loans can cause you to be less spend-thrift. For those who binge a lot and often go on foreign/domestic trips and enjoy spending money, a home loan EMI is a responsibility. Since a share of their budget will be always used for EMI payment, their budget will have to rationalize.

If you have a tight budget, use the home loan calculator to find out the EMI you will be able to afford.

So be careful to enjoy benefits of home loan and get ready to make your dream of own home come true!

Also Read: REAL ESTATE AND AFFORDABLE HOUSING

Disclaimer

The content of this article is general and is provided for informational purposes. It is not a substitute for advice specific to your situation. Information is subject to update, completion, revision, verification, and is subject to change. ART Housing Finance (India) Ltd is not responsible for any direct/indirect loss or liability suffered by any reader because of making financial decisions based on the information provided.

 
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