Buying a house is one of our life’s most important financial decisions. It is a significant achievement, but it also entails a substantial monetary requirement. Hence, proper planning is imperative to make this a success.
The first part of this planning is the arrangement of funds and how to do that. Now, some homebuyers save up and plan to use the cash to complete the transactions. But what if you do not have that much liquidity at your disposal? In that case, home loans can be your ideal solution.
Now, to solve your dilemma and help you decide, we have clarified the advantages and disadvantages of both methods. So, read on to learn more.
Benefits of Home Loan
Purchasing a home is like building an asset for the future. Here, financial institutions provide you with a housing loan against their property. And the lender holds the title to the deed until you repay the loan amount in full with due interest on time.
- To encourage people to buy houses, the Indian government has been offering tax deductions on home loans’ principal amount and interest rate. Under section 80C of the Income Tax of India 1971 Act, an individual can claim up to a Rs 1.5 lakh tax deduction in a financial year. Furthermore, under Section 24B of the Income Tax of India Act, it is allowed to deduct Rs 2 lakh on the interest portion.
- A home loan is a long-term loan, and as you can get two or three decades of repayment tenure, the monthly instalment will not be high, relatively. Instead, depending on your income and expenses, you can opt for an EMI that perfectly suits you.
- Even though you are servicing a home loan, you can still use the property to reside and continue to enjoy its amenities.
- The balance transfer facility of a home loan is another significant benefit of this financing option. You can shift your loan to a different lender offering better terms to lower your debt.
- Completing the home loan successfully is an outstanding achievement for you as a borrower, and it will reflect well on your credit report.
- Last but certainly not least, opting for a housing loan lets you invest your money. You can use that fund later to prepay your loan. This will help you close your loan earlier and meet any financial emergency if and when needed.
Disadvantages of a Home Loan
Along with the benefits, you should also know the disadvantage of this financial product –
- As it is a long-term commitment, the EMIs directly impact your lifestyle. While living with a Home Loan, you may have to downsize your expenses.
- Failing to pay the EMIs can also significantly affect your finances and credit profile. So, you need to ensure you are on time with the payments.
Benefits of cash payment
Here are some significant advantages of cash payments while buying a house:
- You would not have to worry about paying housing loan interest when you use cash to purchase a house.
- Cash for purchasing a home is attractive for sellers as they do not have to depend on the lender’s financial approval. Hence, you may end up getting the property at a better price.
- You are not bound by any contract, and your property is not mortgaged, so even if you want, you can sell it anytime.
Disadvantages of Cash Payment
You must be aware of the cons of cash payment as well if you are going to buy a house –
- Under Section 269SS of the Income Tax Act 2015, you cannot pay over Rs 20,000 in cash at a time. As per the guidelines of the Central Board of Direct Taxes (CBDT), all real estate property transactions have to be done through an account payee cheque.
- When you pay cash to buy a home, all your liquid cash will be invested in the property. In need, you might not be able to arrange the money from this property.
- Just because you do not have any EMIs does not mean you are free from regular expenses. Your regular expenses cannot be met without liquid cash. There are still things like home insurance, maintenance, or property tax that are included in your budget plan, and you cannot avoid them in any way.
So, these are the pros and cons of each method, and the final decision rests with you. However, the question is, what is the ideal way to purchase a home? According to financial experts, balancing these two methods is the key.
To simplify, you can use the cash in hand to make a substantial down payment and take up a housing credit to pay for the rest. In this way, you are in a safe space. However, the ultimate choice rests with you.