When your dream home seems within reach, you’re coming closer to achieving a major milestone in life. It’s decision time, and you have to firm up on certain important financial commitments. If this is the first property you will own, this is a step where you should tread very carefully, because it will have a huge impact on your present and future financial condition.
One of the big ticket decisions is whether you should take a home loan to purchase the property or home, or whether to make a cash payment.
There are pros and cons on both sides, and the decision you make ultimately depends on your unique personal situation, lifestyle, financial status, present and future income and more.
Benefits and Downside of Cash Payments
Let’s plunge straight into the idea of making celebshaunt cash payments. If you have large amounts of ready cash on hand, is it a good idea to put it all down on purchasing a home? When we refer to “cash” obviously we don’t mean bundles of money being handed over to the builder. It means that you are financing the purchase out of your own funds which may be from savings, fixed deposits, investments, sale of jewelry or another property.
Looking at the pros:
- Sellers are more attracted to cash buyers
- Faster transaction
- No interest, processing charges or EMI’s
- Documentation is simpler
- The property becomes yours immediately
- You don’t add to your credit score
On the flip side:
- All your liquidity is locked up in one non-liquid asset
- No tax benefits
- No available funds in case of emergency
- No funds available for other investments
- You have limited choices restricted by the amount you have on hand
Making cash payments works if you have the necessary funds, and you are prepared to lock them up. Remember that you will have to make other payments once the property is yours. This will includes taxes, home improvement and furnishing costs.
Pros and Cons of Home Loans
Taking a home loan has become much easier over the years. A few decades ago, purchasing one’s own home was something that most people achieved only towards the end of their working lives. They had to find funds in their provident funds or retirement benefits. This was because there were hardly trustworthy, affordable opportunities to get a loan to purchase property. Among the first institutions to offer housing loans in India was HDFC in 1978 but there were few mechanisms for recovery other than litigation.
Later, in the 1990s, banks entered this sector, and further on, concepts such as floating interest rates, teaser rates, Loan To Value, more regulatory mechanisms, freeing up of the interest rate regime and other factors have made taking home loans very attractive. In 2022, Indian home buyers availed of more than nine lakh crore rupees worth of home loans, with loans less than 25 lakhs making up the major share of this sector. Today, more than 80% of residential real estate transactions are finalized by taking up a loan.
- Rates have been steadily falling, making loan burdens easier to bear
- Home loan tax benefits available on both principal and interest constituents of EMI
- Funds readily available for emergencies
- Liquidity not locked-in
- Lender does due diligence on documents
- Boosts your credit worthiness when you pay EMIs on time
- Long tenure gives you ample time to plan your finances
- If you have a long-standing relationship with your bank, processing and other fees can be negotiated
- Use your savings only for down payment, and reserve the rest to gain a better rate of interest in investments
- You stand to achieve a higher net worth towards the end of your working life with both an asset as well as liquidity
- Home loans are the cheapest available debt
- You can opt for a much more expensive property than if you had to use your own savings
- You end up paying a huge amount as interest. Even if the property increases in value, this may be offset by the amount of interest you paid initially
- If the property is self-occupied, you may lose the HRA component in your salary package
- Long tenure may become difficult if you have other commitments
- Fluctuating interest rates
- Risk losing higher interest benefits from your investments
The cash vs loan decision is purely an individual one. It depends entirely on your personal situation and preferences. With loans becoming much easier to avail of, the average age of the home buyer has come down to between 30-35 years, something that was unthinkable a few decades ago. Tax concessions provided by the government have also made loans an attractive option. The sector is well regulated and mature, with more transparency. Borrowers have more access to information and this helps them to make the choice that best syncs with their individual specifications.