ET OnlineBuying a home is a long-term commitment. So, when you’re looking to buy a house, you might consider two options– use your own fund, or take out a loan and pay an EMI for a very long period. The choice is simple when you don’t have your own funds since you are left with only one option: getting a home loan. But things get trickier when you have your own money and are also eligible for a home loan.
Also Read | Home loan prepayment of Rs 50,000 vs Rs 1 lakh per year: Which option can save Rs 29 lakh on Rs 40 lakh loan?
In this case, you might feel the need for some genuine advice to help you figure out which option can benefit you financially and mentally. If you find yourself in a situation where you have to decide between buying a Rs 1 cr home in cash or financing it with a loan EMI, what will you do? Chartered Accountant Ruchita Vaghani’s post on X (formerly Twitter) explains the math of buying a Rs 1 cr home in cash and on loan, telling the pros and cons of both options. Her analysis may help you choose the better option.
About the pros of buying a Rs 1 cr home in cash, Ruchita writes in her tweet-
If you buy a Rs 1 cr home in cash, you won’t have any EMI burden, which will give you the peace of mind.
Since there is no interest cost, it will give you the immediate ownership of the property.
With no fear of rising interest rates, the home buyer will have strong negotiating power.
Also Read | Rs 1 cr, Rs 5 cr or Rs 10 cr, how much money do you need for retirement? This financial expert tells you the right amount
About the pros of buying the same home with a home loan, Ruchita says-
The borrower will have liquidity safety, and instead of going for a cash purchase, they can invest the saved amount.
Under Section 24(b) of the Income Tax Act, 1961, a home loan borrower gets tax benefits of Rs 2 lakh/financial year on the interest paid (under the old tax regime).
Apart from that, the individual can also avail the tax benefit of up to Rs 1.50 lakh on the principal paid under old tax regime.
This combined makes an Rs 3.5 lakh tax advantage in a year.
The borrower will also get the inflation advantage since they will repay the loan with ‘future money’.
A borrower may find repaying the loan difficult in the beginning of its tenure, but as their income rises, repaying the loan EMI becomes easier.
There can be potentially higher returns on investment than the loan interest paid.
If one buys their home in cash, their savings are locked in an illiquid asset, and they lose out on potential investment returns. After spending Rs 1 crore on a home loan, a borrower is left with limited liquidity for emergencies.
For an Rs 1 cr home loan, the EMI for 20 years will be Rs 86,000 (at 8.5% interest rate). In 20 years, the borrower will pay Rs 1.07 cr just in interest, and their total outgo will be Rs 2.07 cr for home that can be bought with Rs 1 cr cash.
CA recommends people to buy home with own funds if-
They are risk-averse or near their retirement
They prefer peace of mind and debt-free living to returns
They don’t want EMI burden or interest outgo
CA recommends people to take a home loan if-
They are young (<40) with stable income.
They can invest the remaining savings smartly (equity, mutual fund, business).
Also Read | Home loan prepayment of Rs 50,000 vs Rs 1 lakh per year: Which option can save Rs 29 lakh on Rs 40 lakh loan?
In this case, you might feel the need for some genuine advice to help you figure out which option can benefit you financially and mentally. If you find yourself in a situation where you have to decide between buying a Rs 1 cr home in cash or financing it with a loan EMI, what will you do? Chartered Accountant Ruchita Vaghani’s post on X (formerly Twitter) explains the math of buying a Rs 1 cr home in cash and on loan, telling the pros and cons of both options. Her analysis may help you choose the better option.
Pros of buying Rs 1 cr home in cash
About the pros of buying a Rs 1 cr home in cash, Ruchita writes in her tweet-
If you buy a Rs 1 cr home in cash, you won’t have any EMI burden, which will give you the peace of mind.
Since there is no interest cost, it will give you the immediate ownership of the property.
With no fear of rising interest rates, the home buyer will have strong negotiating power.
Also Read | Rs 1 cr, Rs 5 cr or Rs 10 cr, how much money do you need for retirement? This financial expert tells you the right amount
Pros of buying Rs 1 cr home on loan
About the pros of buying the same home with a home loan, Ruchita says-
The borrower will have liquidity safety, and instead of going for a cash purchase, they can invest the saved amount.
Under Section 24(b) of the Income Tax Act, 1961, a home loan borrower gets tax benefits of Rs 2 lakh/financial year on the interest paid (under the old tax regime).
Apart from that, the individual can also avail the tax benefit of up to Rs 1.50 lakh on the principal paid under old tax regime.
This combined makes an Rs 3.5 lakh tax advantage in a year.
The borrower will also get the inflation advantage since they will repay the loan with ‘future money’.
A borrower may find repaying the loan difficult in the beginning of its tenure, but as their income rises, repaying the loan EMI becomes easier.
There can be potentially higher returns on investment than the loan interest paid.
Cons of purchasing home with own funds
Telling about the disadvantage of buying the home with own funds, Ruchita saysIf one buys their home in cash, their savings are locked in an illiquid asset, and they lose out on potential investment returns. After spending Rs 1 crore on a home loan, a borrower is left with limited liquidity for emergencies.
Cons of purchasing home on loan
Ruchita says that even though the loan amount is Rs 1 crore, the total outgo is Rs 2.7 cr.For an Rs 1 cr home loan, the EMI for 20 years will be Rs 86,000 (at 8.5% interest rate). In 20 years, the borrower will pay Rs 1.07 cr just in interest, and their total outgo will be Rs 2.07 cr for home that can be bought with Rs 1 cr cash.
CA recommends people to buy home with own funds if-
They are risk-averse or near their retirement
They prefer peace of mind and debt-free living to returns
They don’t want EMI burden or interest outgo
CA recommends people to take a home loan if-
They are young (<40) with stable income.
They can invest the remaining savings smartly (equity, mutual fund, business).
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