Buying a home is an event that impacts your life on multiple aspects. A home can give your family an inexplicable amount of happiness, but it also adds serious stress on the financial front. Having to take a loan, or repaying multiple loans, or being invested in other properties as well may make the situation even more complicated.
A common outcome of this situation is that you end up paying more than what you should and spend sleepless nights trying to figure out ways to increase savings and ensure sufficient liquidity. Therefore, it is vital to make sure that your loans are planned in a way that minimises the financial impact they have.
Perform a self-assessment before obtaining a loan
You might have heard about the Five C’s of Credit; they are Character, Capacity, Capital, Collateral, and Conditions. Most lenders use these five factors to determine how well positioned you are to repay the loan, how much money you need, and what interest rate they offer. However, what is more important is to assess your own situation based on these factors before you apply for a loan. In simpler words, you should check parameters like:
– Credit history (Obtaining your CIBIL score may be a good idea)
– Other debts and income, i.e. your ability to repay the new loan with convenience
– How much up-front money (down payment) you can spend towards the property without bearing too much stress
– Your ability to mortgage the property you’re buying or any other property you already have
– Interest rates prevailing in the market and the decision to choose fixed vs. floating rate of interests
Going for a loan only after a careful self-assessment will improve your chances of having a loan that’s really viable for you.
Also, you should also go for insurance on your loan, which can keep you and your family safe in the unfortunate event of death or permanent inability of the primary payer of the loan.
Using the loan as a wealth generation tool
If you have sufficient liquidity already, you might want to buy a property with a large down payment. However, that is not always the best idea. If you have a way to invest your existing liquidity (such as, in a business or stock market) such that it earns a higher percentage value than the interest you would be charged if taken a loan, it is better to use your own money to earn profits while the lender institution pays for your property. Your net profit will be the difference of the profit on the investment of your money and the interest charged by the lender.
Avoid cross-securitizations
At the time of buying a property, it often increases your chances of getting a loan if you cross-securitize it. This means that your loan has considered your existing personal property as well as the new property, both, as collateral. Whereas this guarantees your lender that your existing property may be sold too if the situation gets really bad. However, this may work against you for the very same reason.
A better idea is to have stand-alone loans for each property. You can obtain a separate loan on your existing property and use this money to pay for the up-front part of the payment you need to make for the new one. For the remainder of the payable, you can obtain another loan keeping the new property as collateral.
Optimise your taxes
So, there are multiple points related to taxes that come into the picture when you are buying a property and taking a loan.
- You can avail deductions on the principal paid in the current year under Section 80C of the Income Tax and on the interest paid in the current year under Section 24 of the Income Tax, only on the properties under your possession.
- Additionally, you can pay or save taxes by correctly filing the loss or income on your house property. These may be the cost of repair, depreciation, construction, or incomes such as rent, etc.
- Long-term capital gains or short-term capital gains: They are applicable when you’re an investor who has sold a property recently or is planning to sell the one you bought earlier. A long-term capital gain is applicable if you have held the property for at least 36 months before selling it. Anything lower than that falls under short-term capital gain, which is taxable.
Also, the most important aspect of taking a loan is ensuring that you save sufficient money and keep enough liquidity all the time that can help you sail through any difficult situation.
