Home represents stability, certainty, and a sense of belonging.
In our Indian society, owning a house assures your value as a “success in life”. Today, this dream is relatively easier to achieve because of the multitude of financial institutions eager to hand out loans at comparable rates. A home loan is one of the debts that is welcomed in one’s credit mix. Being one of the best examples of ‘good debt’, a home loan has varied benefits apart from the fact that it ends with you becoming a ‘home owner’.
Let’s take a look at some of the benefits of taking up this commitment:
1. Tax Savings/Benefits
- Deduction for Interest Paid on Housing Loan – The interest portion of the EMI paid for the year can be claimed as a deduction from your total income up to a maximum of Rs 2 lakh under Section 24.
- Deduction on Principal repayment – The Principal portion of the EMI paid for the year is allowed as deduction under Section 80C. The maximum amount that can be claimed is up to Rs 1.5 lakh.
- Deduction for Joint Home Loan – If the loan is taken jointly, then each of the loan holders can claim a deduction for home loan interest up to Rs 2 lakh each and principal repayment u/s 80C up to Rs 1.5 lakh each in their individual tax returns. To claim this deduction, they should also be co-owners of the property taken on loan. So, a loan taken jointly with your family can help you claim a larger tax benefit.
2. Low-interest rate loan
Being secured by the underlying property, a home loan is available at attractive interest rates.
3. Longer Repayment Tenure
A home loan comes with the longest repayment tenure options, easily going up to 30 years, this reduces the EMIs and makes repayment affordable.
4. Committed Investment
Having a home loan means you have committed a considerable portion of your income to an asset that you will own at the end of the tenure. This commitment keeps you from splurging your hard-earned money and allows you to own an asset at the end of the investment period. This helps you stay focused and avoid unnecessary expenses. A home loan is a prudent investment.
5. EMI vs Rent
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- Owning a home, allows you to save on rent. Paying rent makes less economic sense in the long term since you do not have ownership of the asset. Plus, renting involves annual hikes, which are often higher than the rate of inflation. Instead of paying increasing rent, one can easily own the same type of home in 15-20 years.
- Even if you decide not to use this house for self-occupation, you can earn a good amount by renting it out and help yourself with an additional source of income. The rent income might be enough to cover a considerable portion of the EMI expense.
6. Nil to Negligible prepayment charges
Most of the banks in India do not charge the borrowers in case they decide to prepay their loans. Hence if you come upon a lump sum and aren’t willing to risk it by investing it in other investment avenues, paying off your home loan might help you save some interest.
7. Due diligence of property by the bank
Purchasing a property in an under-construction project can be quite risky given the number of projects propping up every year. Banks perform strict due diligence before financing a project, this reduces the risk to a great extent. The project-related documents, the title, legal clearances are some of the aspects covered by the due diligence performed by the bank. The developer too has the added fear of being blacklisted by the bank if there are discrepancies in the promise and performance. So, taking a home loan from a bank that is backing the project, is safer than an unapproved project.
8. Boost to the Credit Score
Age of credit is one of the important factors in calculating your credit score. A long tenure loan such as a home loan can do wonders for the formula. Having a home loan also improves the diversity of the credit mix, another aspect of your credit score. Paying off your EMIs on a home loan ensures a better credit score and creditworthiness. If you have a good record on your home loan, it becomes easy for you to finance other purchases like car loans or your child’s student loan.
9. Higher chances of being eligible for preapproved loans in the future
Elevating you to a position from where you have better negotiation power, and ensuring that you do not have to worry about rejection of loan applications, hampering your credit records. A pre-approved home loan is given to eligible consumers who have a sound financial background. A good track of repaying your home loan makes you creditworthy and thus eligible for preapproved loans.
10. Better investment option during inflationary times
Inflationary impact on interest rates might make investments in other avenues less profitable. Locking in on a favorable interest rate during such times can actually help you make money by having a home loan.
All said and done, you have to assess your own capacity before undertaking such a long-term commitment. This requires discipline, financial acumen, and ________. A single slipup in your repayment schedule can cause a drop in your credit score, endangering your ability to avail loans at lower rates in the future. Also, the inability to repay may lead to foreclosure by the banks and loss of home for you. Additionally, default in any of the loans you have availed from your bank can result in all your loans being tagged as NPAs.You thus have to be cautious about your repayments throughout the tenure of your loan.
Our debt counselors at Credit Monitor can help you budget your expenses and plan your repayments effectively.
