Owning a home is a dream that almost all of us have in our mind. The way to fulfill this dream goes through a Home Loan for most of us. Home Loan is the sum of money borrowed from a bank or a financial institution to purchase or construct a house. It is a secured loan where the property is mortgaged to the lender as a security till the repayment of the loan. The bank or financial institution holds the title or the sale deed of the property till the loan has been paid back with the interest due for it. Once you will pay off the amount bank will hand you over the documents of your house. Taking a home loan is a big liability as the tenure of the home loan goes for almost 10 to 30 years. So before you take a decision whether to take a home loan or not, you must know both the aspects of such type of loans. Some advantages and disadvantages of home loan are discussed below.
A Mortgage makes Homeownership Affordable
Mortgage loans are very helpful for an average earning or salaried persons to have a home. Home loans are granted on the basis of your credit score and above all the repayment capacity. When you have an income on a regular basis and hold the capacity of servicing EMIs, banks will easily grant you a home loan. Moreover, the home loan comes with a longer tenure. A longer tenure means a smaller EMI. So you can easily enjoy the ownership of house without being burdened with higher EMIs.
A Home Loan is a Cost-Effective way of Borrowing
Home loan interest rate tends to be lower than any other form of borrowing because the loan is secured against your property. Home loans are the cheapest loan available in the market. The present interest rate on home loans is 8.35%. But one thing to be noticed here is that there may be a slight difference in interest rate if you have a low credit rating.
They are a Form of Forced Savings
Money in hand escapes at the lightning speed. When you know that you have a good income source but can’t save any money than taking a home loan is the best to have savings. Actually, the money paid in EMI can be considered as an investment rather than expenditure. The reason behind such consideration is that after paying a few years of EMI you will be the owner of the house which is have a market value in cores.
They Come with Tax Benefit
You enjoy tax deductions on the principal and interest paid against a home loan. In India, a borrower can claim deductions under Section 80C of the Income Tax Act for the repayment of the principal component. The limit in this regard is set at Rs 1.5 lakh. Section 24 of the Act, on the other hand, allows borrowers to claim deductions on repayment of the interest component. The deduction limit here is set at Rs 2 lakhs. When you buy a house without taking a home loan, you are letting go of these benefits, too.
This is another major benefit of home loan because over the past few decades’ capital appreciation in the case of property prices has been much higher than the interest required to be paid on housing loan. So for example if a person has taken a loan of 1,00,000 at the interest rate of 10 percent and if the value of that said property increases to 5,00,000 by the end of the tenure then the interest of 10 percent will not be big deal. The capital appreciation will take care of interest expenses and the person will still be in profit only.
Home Loan is a Big Commitment
When you’re approved for a home loan, you’re taking on a decades-long commitment. Most of the home loans come with a tenure of 10 to 30 years. That means a significant time of your life you have to be under a debt. Things will be more complicated if during this span of time you want to move out or want to sell the property.
They Carry some Risk
The tenure of a decade or two is quite long time and our future is of course unforeseen. Circumstances can arise that could make it difficult for you to keep up with your home loan repayments. Unforeseen life events like illness, unemployment or divorce could put you in a tough financial condition and your inability to repay the loan can lead to loss of your property. This means the bank or NBFC has the authority to sell your home and get the money back which bank has given as a home loan.
Loss of HRA Tax Benefit:
HRA stands for House Rent Allowance. HRA is an amount paid by employers to employees as a part of their salaries. HRA provides employees with tax benefits for the rent that they pay for housing every year. To claim HRA for tax benefit, a person should satisfy the following criteria:
- You own a house in one city & stay on rent in another city.
- You house is under construction and you are staying in the same city on rent.
- Your house is in the city and you are staying on rent in same city: You can claim HRA exemption, provided that you can prove that your house is far away from your workplace. In this case you can claim tax benefits on both Home Loan and HRA. Also you need to declare rental income in your Income Tax returns. If your flat is vacant then you should declare notional rent.
Hence, you cannot claim HRA Exemption if you are living in your own house and the entire component will be taxable. So, when you shift to the house taken on home loan, you cannot claim HRA benefits while filing income tax. Instead you can claim the tax benefits on the payment made towards your home loan.
Presence of Opportunity Lost
This is the disadvantage which is often overlooked by the home loan takers. Whatever amount a borrower is paying as a principal component during the year, the chances of getting a return on that amount is lost. Instead of paying EMIs if a person invests that amount in a bank fixed deposit of mutual funds, he would get handsome returns on the principal invested by him.
It is clear from above discussion that home loans have many benefits and some drawbacks too. If you are about to apply for Home Loan, you must look at both the sides of the coin before coming to the final decision.