Home Loan or Direct payment?

POSTED BY shailesh pai ON March 23, 2013 2:21 pm COMMENTS (12)

Sir,

 I am a regular reader of this Forum and the jagoinvestor site and I must appreciate the quality of work that you have been doing. I owe my basics of financial planning to your site (PPF + Term + Health Insurance have been taken care of).

  I have a dilemma: I am intending to buy a flat (for residential purpose and not for investment) the total of which comes to approx 40L including registration. I and my wife combined earn approx 2.25L per month (all in white). After reading various articles on your site about Home loan, I was under the impression that buying a house with Home loan is not a sound financial decision. This was confirmed by my CA who asked me to pay about 1L per month to the Builder who has agreed to this. But a friend of mine who is also a CA, recently adviced me to go for a Home loan and pay the EMI of about 35000 per month and invest the remaining in MF. He told me that this will help me for Income tax rebate too and it will be substantial as I come under 30% Income tax bracket. He even told that both me and my wife can avail loan and both of us can avail the benefit.  Kindly give your expert opinion on which is the better method.

12 replies on this article “Home Loan or Direct payment?”

  1. Dear Shailesh, if you can wait for 4-5 years, please opt DP + home loan option to protect your losses.

    Thanks

    Ashal

  2. Dear Shailesh, if you are so much loving the project, please opt home loan option.

    Thanks

    Ashal

    1. shailesh pai says:

      Thanks a lot Sir. Your opinion is highly valued.

  3. shailesh pai says:

    Sir,
    I am totally confused now. After reading both your comments, I got the impression that waiting till completion of project / buying a ready-to-move in flat is preferable. (By the way the city of residence is Mangalore).
    I would like to clarify that real-estate has not really boomed in to that extent like in the other cities mentioned. Getting a flat in good location / good construction is difficult.This particular project is coming up in a good location and the Builders are also reputed with nearly 30 projects completed till date (most of them within time frame and upto max 6 months delay). Hence i had zeroed in on the project. As i see it, the pre-launch rates are quite low and it will definitely rise once the project kicks off (expected within 1 month).
    The idea of awaiting for 3 years for the project to complete is good, but I feel that it will be difficult to get a flat in that particular building after construction.
    So Sir, if I really wanted to buy this particular project, will you kindly tell me whether direct payment or availing home loan is better. (Thinking only from financial point of view and not taking into consideration the risks associated)

    1. rakesh says:

      @Shailesh,

      Lot of builders have a taken a liking for Mangalore lately. LNT, Godrej, Brigade, Purvankara. Prestige and Shoba to follow soon. Even though these are reputed builders they may run into issues in the long run. So you need to keep atleast one year buffer for completion of the project.

      1. shailesh pai says:

        Sir,
        Yes, I found that the real estate business is on the rise here in Mangalore. So, I can expect the rates to be very high say 3-4 years down the line. In that case, my plan to buy a flat now (to be constructed) looks fine. So, in such scenario option 1 of direct payment or Option 2 of Home Loan + MF will help? lets consider 1 year delay in possession (total 4 years from now)

  4. Dear Shailesh, May I know in which city you are planning to buy? Why i’m asking so? I do have few experiences of my friends from Delhi, Noida, G’gaon, Mumbai, Pune, Hy’bad, Chennai & Banglore where the projects were delayed for more than 4-5 years & even after that, the promised specifications were not met up at the time of final possession.

    There is more to it – both of your CA are wrongly advising. In case of CA1, it’s your money at stake with out any confirmed delivery of project. also add the opportunity cost to your money. Say as per schedule, you paid close to 35L Rs. in next 30 months with initial DP of 3L Rs. & rest in 1L Rs. mly pay out. Now the project is no where near completion, the builder ‘ll compensate you by way of rent substitute. What ‘ll be you rent at that time? very less. So in effect, instead of offering an interest pay out to you for the delay, the deal is in favor of builder.

    CA2 – the home loan for both of you ‘ll be beneficial only after the possession of the house. Till no possession, no tax benefit on the interest part. Yes principal repayment benefit ‘ll be available even before possession but keeping your earning potential in mind, I do not think both of you do have any spare limit in section 80C’s 1L Rs.

    Think over it. If you indeed want to purchase for self consumption, go for a ready built one. It may cost a bit more say 45-48L Rs. but there ‘ll be no headache later on for delayed delivery & to add it, income tax benefit ‘ll also start from day one.

    Thanks

    Ashal

  5. Ramesh says:

    How much can you downpay?

    1. shailesh pai says:

      3-4L maybe. The Builder is fine with that. 3L down payment and 1L per month for the rest.

      1. Ramesh says:

        Ok. So you dont have money at all (everything is in future).

        Tell me what are the risks in Option 1:
        1. Is the payment like 3L DP, and rest 1L for next 37 months? Which means no interest at all.
        2. Is it cheque based or cash based?
        3. What if you do not pay after 12 months? What can the builder do?
        4. When can you shift into that house?

        1. shailesh pai says:

          Sir,
          Risks regarding what? As far as my job goes I have a very secured job.
          The builder has started to build the project. He is expecting it to finish by 30 months.
          Its 3L for initial downpayment cum reservation in my name rest 1L per month for 3 years which roughly amounts to the said 40L.
          its cheque based payments.
          I can shift once he completes the project (agreement is that if he does not finish on time, he will pay the rent as exisiting at that time to the flat in which i am currently staying)

          1. Ramesh says:

            I was talking about the downside risk. Think about, what if he does not complete the project. How are you going to make him pay your rent? Where is your leverage here? After 30 months, you have already paid him 33L, you still do not have the house, and from my point of view, you do not have any leverage. A 6 month delay is very common.

            Option 2:
            You ask a Bank to get you a loan. Looking at your income, it will provide you one. You pay 35kx12x3= around 10.5+3 lakhs. Mostly, I would suppose that will be related to the construction activity. Underconstruction properties are treated a little different from tax perspective, but that will be you CA’s job.

            You save the rest 65k per month and put them into savings/MF, whatever. Total savings around 20L, which can be around 24-26L if you save in debt instruments. Then your loan liability will be around 35-36L, and you can even foreclose it at that time.

            Coming to the original downside risk- if the builder does not complete, you can wait a bit more leisurely as compared to option 1. Also, because the bank will release money related to construction completion, the builder has to complete the house before he gets the money. Indirectly you still have some leverage.

            Option 3: You wait out with a relaxed mindset. You work and save your money without tying it up either in an under-construction house or bank-debt. You are anyways living on rent for next 30 months in both options 1 and 2. In case you get a ready-to-move-in decent house elsewhere, you choose that. Otherwise, after 30 months, when the builder actually completes the house (in case), then you take a proper decision at that time. You can buy with cash or use bank loan as you deem fit at that time.

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