Surprised! Why should everyone take a home loan?
In this article, we will understand what are the major benefits of taking a home loan. Even if you have surplus cash in hand, still you should take a home loan.
You may be surprised why I am recommending you to take a home loan even if anyone has extra cash in hand. You will get the answer to this question by the end of this article.
Major Benefits of Home Loans:
The home loans offer several benefits but few significant features are explained below.
1) Lowest Rate of Interest:
The first and foremost reason behind taking a home loan is as it offers the lowest rate of interest as compared to other types of loans such as credit card, personal loan, car loan, gold loans etc.
If you are using a credit card, you have to pay interest up to 30% per annum and most of the professionals use credit cards very often. On the other hand, the rate of interest in the case of home loans is 8.5 to 8.75% per annum. You can easily understand there is a huge difference between the interest rate of home loan and credit cards.
Similarly, interest rates of personal loan are 14 to 16% and a car loan is 8.5 to 9% per annum. Hence, if you are currently paying off any other loans, you should first take a home loan and settle all other loans because you can at least save some money.
2) Higher Returns on Investment:
Let us understand how a home loan can provide you with a higher return on investment with an example. The real estate investments are always considered as the best and risk-free investment, provided you didn’t purchase a disputed property. This is because the price of properties appreciates with respect to time.
There are some similarities between real estate investing and stock market investing both increases with time. But some stocks also depreciate in case of stock market investing, however, in the long run investing in the capital market instruments is also beneficial.
Suppose you have ready cash of Rs 10 lacs and you are planning to purchase a house worth Rs 50 lacs then you would require to take home of Rs 40 lacs.
Now assume you pay Rs 10 lacs as a down payment and rest Rs 40 lacs you have taken as a loan.
Further, after one year, suppose the worth of your house is appreciated by 15%, then the current market value will become Rs 57.5 lacs. Thus your net profit would be 7.5 lacs, however, you have invested only 10 lacs to make such a profit.
In such a way, you made an appreciation of 7.5 lacs by investing only 10 lacs in a year. But the interest you paid for the home loans will be 3.2 lacs (Assuming an interest rate of 8% per annum).
Thus the net profit will be (7.5 – 3.2) = 4.3 lacs. Hence your net return on investment will be 43% which is far better than other investment vehicles.
3) Tax Benefits:
As per Section 80C of Income Tax Act, in July 2019 the maximum amount of interest paid on a housing loan eligible for tax benefit. The maximum amount of interest paid was increased to 3.5 lacs in July 2019, however, it was 2 lacs before.
The different sections of the Income Tax Act under which you can avail a tax rebate on housing loans are as follows.
1) Section 80C:
Under this section, you will get up to Rs 1.5 lakh on principal amount repayment.
2) Section 24:
You will get tax deductions of Rs 2.0 lakhs on the interest payable of housing loans.
3) Section 80EE:
If you are a first time home buyer, you will get an additional tax rebate of Rs 50,000/- on interest payable under this section.
These were the major advantages of taking a housing loan. If you’re the first time home buyer, you are likely to avail additional tax benefits as well.
However, the circumstances shown above may not be true as the returns on investment also depend on the location of the property, appreciation, etc. Hence, should not be understood as our recommendation instead it is more about information purpose only.