Think about buying a home and the first thing that will cross your mind is getting a home loan. And for many of us in India, it is inevitable – how would you pay the crores needed to buy a house in one of India’s big cities otherwise? But suppose you do have the money to pay for a new house without opting for a loan? Maybe you have the option of selling some existing property, or have received a large amount in inheritance, or maybe you just make that much money from your employment. What do you do then?
There are pros and cons to opting to pay cash-down for a property. Let us try and examine some of them:
1. No interest payment: If you factor in the interest component, the eventual amount you are paying ends up being a lot more than the cost of the house. On a loan of 1 crore, for a tenure of 20 years at 10.5%, the interest you would pay over the term of the loan is 1.40 crores! So there is a case for saying that if this expense can be avoided, it should be done.
2. Better bargaining position: Even for the builder / seller, the prospect of getting his or her money without involving a Bank is an enticing one. Try it out. Visit a builder’s office of a just-completed project and mention that you plan to pay out of available funds and not a home loan and observe how an immediate discount is put on the table.
3. Saves the hassle of getting a loan: For all their tall claims, Banks still make it incredibly difficult to get a Home loan. This leads to uncertainty and in extreme cases, even price increases. When you are paying out of your own funds, this is eliminated completely.
4. Future protection: Once you take a Home Loan, the EMI amount is locked in; it is an outgo you are going to have to live with for the remaining period of the loan tenure. But your income is not as certain – it may increase, sure, but in an unforeseen event, you would want to be able to live under your own roof rather than worry about the Bank taking it away because you can no longer afford the EMI
5. Credit history: Last but not least, taking on a charge as big as a Home loan affects your credit record and makes it harder for you to take loans later. Alternately, you might have a less-than-perfect credit history due to which you may not be able to easily access a home loan right now. These are factors that should make you consider the option of paying for your property in an all-cash deal if you can manage it.
1. No tax benefit: In the current Tax regime, there are quite significant tax breaks for both principal and interest payments. Obviously if you do not opt for a home loan at all, you would not get the benefit if these.
2. Depletion of emergency funds: It does not make sense to dig into your long-term savings to pay for a property since that means if you do suffer an injury or medical condition etc., you might not have the funds in reserve to pay for your treatment. Only if you actually can spare the funds to buy a new home without significantly affecting savings should you think about this option.
3. Your money would be tied up in a single asset class: From a purely investment perspective, it makes sense to allocate funds across different sectors rather than putting it all into real estate, which is not really the fastest growing asset right now
All in all, whether it makes sense for you to pay all-cash for your next home is a decision that depends on your specific situation. Try to assess whether the Pro’s highlighted above apply to you more strongly, or the ‘Cons’. Ultimately, it is your house and you must take the decision that benefits you!