In last week’s personal finance edition, we debated whether to own or rent a house based on various features. Today, we will discuss whether one should use his/her savings or take a huge loan to purchase a home.
Here we go!
Consider the Tradeoff
Using your savings can be considered if you have such a huge cash outlay at your disposal for purchasing a house. But what needs to be considered is how much of your savings is left after purchasing the home.
There’s no point in purchasing a house with your life savings and later struggling to make ends meet!
Interest Rates in the Economy
If interest rates in the economy have hit rock bottoms, such as during the 2008 recession and the recent COVID-19 crisis, you can avail of a home loan at dirt-cheap rates. This makes sense when you can avail of a home loan at affordable rates and invest your savings in high-interest-bearing instruments such as mutual funds, stocks, or PPF.
On the other hand, if interest rates are increasing or are at their lifetime highs, one can wait to avail of a home loan or use his/her savings.
Illiquid Asset
Purchasing a house will block a huge sum of money in one go if you are using your savings.
Whereas if you opt for a home loan, it will lead to fixed monthly payments from your pocket. The monetary outgo will not be as huge as life savings.
Deduction on Interest Payments
When you take a housing loan, you can claim a tax deduction of up to Rs 1.5 lakh under Section 80C for the principal amount paid in a financial year. Also, you can claim up to Rs 2 lakh on the interest amount.
Stage of Life
If you are someone close to retirement with handsome savings, then it may make sense to purchase a house through your savings, whereas if you have just started earning, it does not make sense to block all your net worth in a home!
These are some factors to consider before deciding to use savings or take a huge home loan. Whatever the decision is, it must be taken carefully, for it is irreversible!
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
