The standard dream of most middle class Indians is to save enough money to buy a home to live in. The comfort of living in your own home and the sense of financial security and accomplishment that it provides is inexplicable. But the skyrocketing property price often makes affordability an issue. It has kept home buying out of reach of a large part of the population. People continue to stay on rent since buying a house is frightfully expensive.
This is where home loans help. In fact taking a home loan to own a property is a wiser financial decision than staying on rent. It helps you save money in a number of ways.
- Saving on rentals– A home loan helps you acquire a valuable asset. Initial EMIs may put pressure on the cash flows but once you receive possession you will save on the rental expenses. It’s true that while rents may take up only 20% of one’s income, EMI would take 40-50%. You would have less money to spend and save elsewhere. But as long as you do not take up additional loans it would still be fine. Salary will increase over a period of time while EMIs will remain constant. So the amount of money you will be left with after paying off the EMI will increase with time.
- Appreciation – A big reason why you should buy a house even if it means taking a 20 year home loan is that real estate prices appreciate over a period of time. After 20 years when you are through with the loan repayment you will own a property whose value will be far more than the loan amount. Owning a property also shields you from inflationary pressures. Rental prices increase with inflation. You also have the option of selling the house at a much higher price than you bought initially.
- Tax Savings – There will be indirect benefits from taking a home loan in the form of tax savings on EMI. Under Section 80C of the Income Tax Act one can claim a deduction of upto Rs 1.5 Lakhs per year on the principal repayment of the home loan. Payment made towards stamp duty and registration charges can also be claimed under Section 80C in the year in which they are paid. Similarly under Section 24(b) of the Income Tax Act you can claim a deduction of upto Rs 2 Lakh on the interest payments on the loan provided you reside in that house.
If you have taken a joint loan along with your spouse you both can claim a deduction, which will mean double the benefits. In this case deductions will go up to Rs 3 Lakhs per year under Section 80C and Rs 4 lakh under Section 24(b). So if you come in the 30% tax bracket you save more than Rs 2 Lakhs on taxes jointly. Hence it makes more sense to take a joint loan and save on tax and reduce the overall expenditure considerably. Before taking a home loan you just need to make sure that you have sufficient amount to make the down payment, a buffer of 6-8 months of EMI and an EMI amount that does not exceed 40%of your monthly income.
- Second home loan-If you take a second home loan to purchase a house for rental income or long term capital gains you will be eligible for tax benefits under Section 80C. Though there is no exemption on the principal amount for second home loans, there is no limit on the exemption on the interest component. A full tax benefit on the interest payable will help you save a lot of money.
5. Greater loan Eligibility– Once you pay your loan in full and acquire complete ownership it becomes your greatest asset. The size of your asset plays a big role in determining the eligibility of your future loan requirements. If you own a big asset it increases your chances of getting approved for a loan. A house can also be used as collateral to secure loans against property at a lower rate of interest.
6. Build Credit History– If you maintain a clean track record of paying EMIs on time it can go a long way in building a good credit score. It will show that you are financially sound and responsible towards repaying your debts. A good credit score helps you save a lot of money in terms of lower insurance premiums and lower home loan interest rates on future loans.
Hence if you have made up your mind to stay in a city and you have enough savings to make the down payment you should take a home loan to buy a house and reap its financial benefits.