Loans in general and home loans in specific, if managed well, can help you live your dreams and get the house you always wanted. However, note that the lack of funds is not the sole reason why one takes a home loan. Although looked upon as a liability, the financing facility of a loan comes with a lot of benefits. In today’s world, home loans are one of the cheapest borrowing instruments as it has a low rate of interest. Here are the major benefits of taking up a home loan:
Taking a home loan means tax saving. There are a lot of tax deductions in the Income Tax Act under Sections 24, 80C, and 80EEA. If you have an eligible home loan, you can claim up to Rs.5 lakh as a tax deduction.
Grow Your Funds
As mentioned above, availing a home loan can help you save on taxes. The amount of money saved can be used for investing and you can earn a lot of returns on these savings. Here is an example to explain how you can grow your funds:
Let us assume the current interest rates on a floating rate home loan is around 8% per annum (largely depends on your credit score, tenure and loan amount). On your home loan of 8%, let us assume that the interest amount is Rs.3.5 lakh in one year and you are also allowed to get a deduction on the entire amount under Section 80EEA and Section 24. This would mean that, if you do indeed come under the 30% tax bracket, you can save on tax up to Rs.1.05 lakh. The home loan’s cost of borrowing is now effectively 5.6% p.a. You can now earn 7.5%-10% p.a. if you smartly invest the remaining funds.
The Benefit of Liquidity
Many people use their funds for buying a house and then live in a liquidity crunch. When you do come across a liquidity crunch in your life, you may tend to turn to a collateralised loan or a personal loan. You must note that these will surely cost you a lot more interest as compared to the interest amount you will have to pay on a home loan.
Diligence on the Part of the Bank
Most banks exercise diligence before they approve the financing of a project. They will make sure to verify all related documents of the project, and the legal clearances before they approve a home loan. Taking a home loan from a bank which has approved your project, makes it safer for you.