Buying a House: Taking a Home Loan vs Using Personal Funds

Should you use your own hard-earned money or take out a home loan? This is always one of the most crucial questions that we ask ourselves when we plan to buy a house. Using your personal funds seem to be the best option at first. But like any other choice, it comes with its own set of advantages and disadvantages.

Deciding on the best option ultimately boils down to numbers. The choice you make will depend on various factors with the most obvious one being that which gives you the most returns and value. 

In this post, we address the dilemma of using personal funds versus opting for a home loan. 

Home loans 

Most of us would park the bulk of our savings in avenues that would earn us interest. If this amount turns out to be more than the interest you will be paying for your home loan, then opting for a loan is wiser. 

The common perception is that home loans are meant only for middle-class or lower-income segment homebuyers. However, the advantages of a home loan remain independent of your financial status. 

To begin with, there are significant tax benefits that can be accrued with a home loan. You can claim a deduction of up to Rs 1.5 lakhs on the principal amount and up to Rs 2 lakhs on interest paid under Section 80-C of the Income Tax Act. Home loans, therefore, can be very useful in gaining tax savings. 

Home loans can improve your credit score to a great extent if you ensure timely repayments and no defaults. Increasing your creditworthiness with a home loan is one of the best ways to assure your eligibility for obtaining more loans and credit in the future.

A home loan frees up your personal funds allowing you to diversify your investments. Even if you do have enough saved, it is wiser to use only a part of it towards real estate acquisitions. Putting the remaining in other channels can give you immediate and higher monetary returns.

Personal funds

One of the most significant benefits of buying a house with your own money is that the overall cost would turn out to be considerably lesser as there is no interest to be paid. Home loans last for at least 20 years on average, and the interest you pay for that period makes the house that much more expensive.

By paying with your own funds, you are escaping the volatility that the market inflicts on buyers who rely on home loans. You don’t need to watch out for repo rate fluctuations or interest rate changes, and you are protected, to a large extent, from the vagaries of builders and banks.

With personal money, you gain the first-mover advantage in a competitive market. There is no evaluation or waiting period involved, and you avoid the hassles of paperwork that come with a home loan.

Which one is better?

The answer to this question is highly dependent on personal circumstances and factors like the loan amount and its tenure. It also depends on the interest that you need to pay on loan compared to the interest you are gaining from your current investments. These figures are closely connected and need to be meticulously calculated and considered to arrive at a decision that’s most suitable for you.

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