Most homebuyers are faced with a dilemma, whether to take a home loan or use savings to fund the purchase of their new home. No doubt, using savings looks tempting with respect to your financial health, as you would not pay the interest that would have added to your overall cost otherwise. And, there is no liability of paying EMIs for so many years.
But, if you look closer, by using savings, you miss out on many benefits which are offered on a home loan. And it also reduces your financial flexibility.
Let’s look at the benefits, which are offered on a home loan and if it is better than savings.
A home loan borrower is entitled to multiple income tax benefits and the total benefits amount to Rs 3.5 lakh in a financial year. Under the various section of the Income Tax Act, a borrower is entitled to the following benefits:
- Section 80C: Tax deduction of up to Rs 1.5 lakh from total taxable income on principal repayment
- Section 24: Allows a maximum deduction of up to Rs 2 lakh on the interest payable, and applies only on those properties whose construction is completed within 5 years
- Section 80EE: First time home buyers with a loan amount of up to Rs 35 lakh can claim an additional Rs 50,000 on the interest payable every financial year
There are also additional benefits in the form of interest subsidy if the home loan is availed under the PMAY CLSS scheme.
No Affect on Financial Liquidity
Buying a home requires a big financial commitment, and by using savings, you are compromising on your financial security. It impacts your liquidity as well as the ability to access funds in case of an emergency.
Buying a house using your years of savings is like, putting all your eggs in one basket. You cannot even liquidate this investment very easily if any need arises.
Whereas, in-home loan, you stagger the purchase in small EMIs over many years, least affecting your financial stability. Using a home loan calculator, you can calculate your EMI amount and decide on loan tenure accordingly.
You Can Get a Bigger House at Better Location
One of the disadvantages of using savings is, you have to narrow down your search as per your budget. And, given the budget constraints, you may have to settle in a smaller size apartment or at a less preferred locality.
But, when buying with a home loan, you could purchase a bigger house or have it at a better location without compromising on your choices.
It’s a wrong notion that with a home loan, the final cost of your home gets way higher. Using all the tax benefits offered on a home loan, the final cost difference between home loan and savings is very less. In fact, using savings is a bad choice and financially less feasible.
Using a home loan calculator, you can calculate the ideal EMI amount, which helps you to plan well in advance and in a way, helps you to become financially prudent.