Enough has been said and written about the benefits of availing a home loan. A quick search of ‘home loan benefits’ on our blog shows up four different posts. While we were brainstorming our next topic for the finance category, a user on Quora asked us an interesting question. He wanted to know the disadvantages of taking a home loan. So, here we are with our next post.
Before we begin, let us tell you that home loan comes with certain tax benefits. You get a rebate on your tax under Section 24, 80 EE and 80C of Income Tax Act.
Now, let’s have a look at the disadvantages of taking a home loan.
Impact on the total property cost
When you avail a home loan, the cost of the property increases. Not in the literal sense. However, let’s assume that you bought an apartment in Bangalore for Rs 50 Lakh in 2014. For the same, you availed a home loan of Rs 40 Lakh. Now, you want to sell the apartment at Rs 70 Lakh. This would mean Rs 20 Lakh profit in five years, which is about 8% y-o-y appreciation. Considering the current market scenario, it is good.
However, you will not make huge profits. Why? Interest paid on the home loan. In the last five years, you would have paid interest of more than Rs 20 Lakh.
It’s a long-term commitment
Another disadvantage of home loan is that it goes on for many years. On average, the home loan usually lasts for 10-12 years. Now, unless there is a sharp rise in your salary, the EMIs can impact your finances (considering the increasing inflation rate). And if due to any unforeseen situations, you are not able to pay the EMIs, you will become a defaulter in the bank’s eyes, which will directly impact your credit score.
Change in interest rate
Two years ago, Abhiram Balakrishnan booked a home using our Home Buying Advisory Services. He had taken a loan to support his finances. Last month, he wrote to our advisor stating, “Despite diligently paying the EMIs, my principal outstanding is still the same as two years ago.” Well, this is a classic case. When the interest rate increases, instead of increasing the EMIs, banks often increase your home loan tenure. This, in turn, results in higher interest component.
Tip: Opting for a fixed interest rate can be of some help in a volatile market.
In business economics, opportunity cost means a profit, benefit, or value of something that must be given up to acquire or achieve something else.
Over the last few years, real estate has given much lower returns when compared to other asset class of investment. Since the home loan is for a longer tenure, it is considered as an opportunity lost. However, this is a debatable point. Some finance experts opine that you should never put all your eggs in one basket. Even if you have the finances to buy a home without a loan, you should analyse and figure out the best possible use of your money.
Now you may argue that you can always liquidate the property investment by selling it. Let us tell you that selling a property is a time-taking process.
All said and done, taking a home loan is a personal choice that depends on multiple factors like one’s financial capacity. Like in any other financial decision, you should always tread with caution.
Read More: 2019: Find Lowest Home Loan Interest Rates