Home loan vs down payment

POSTED BY Ashish ON September 3, 2013 9:02 pm COMMENTS (11)

Hello,

I have just blocked an apartment. The total cost is around 70L (excl regn). I would like to know if it is better to take a home loan or give complete cash payment. For the second option I’ll have to sell a property 🙂

I know that home loan provides tax benefit, but is it worth considering that we repay almost double the loan amount over a period of 15 yrs. Tax saving will be around 7L for 15 yrs loan of 30L (1.5L interest + part of 1L principal; entire principal amount of 1L cannot be claimed due to epf and epf will keep increasing yearly, so I have taken approx amount for principal. I think if I go for joint loan with spouse we can get benefit on 1.5L interest plus 1L principal each?)

Loan = 30L; repayment = 60L; tax saving = approx. 7L

1. No loan (cash 45L + sell property to raise 25L)

2. 40L cash + 30L loan (SBI)

3. 40L cash + 30L loan + sell site and put 25L in MaxGain (SBI)

One advatnage of option 1 is that – there’s no EMI burden for 15 yrs…however I also think that instead of giving down payment, if I stay invested, the value of investment may be much higher than the loan interest we pay over a period of 15 yrs. Please suggest what is the best option.

11 replies on this article “Home loan vs down payment”

  1. Dear Ashish, yes is my answer.

    Thanks

    Ashal

  2. Dear Ashish, At any given day, I w’d prefer loan purchase over Cash purchase for an under construction property. The reason is simple, the bank ‘ll not release the amopunt more than the %age completion of the project so any delay may prove costly to you if it’s purchased on all cash.

    Thanks

    Ashal

    1. Ashish says:

      Hi Ashal, Even if I go for cash payment, I’ll be paying the amount as per slabs (% completion) and not at one shot in the beginning. Are you saying that we may not be able to “verify” the actual % completion?

  3. Dear Ashish, that’s possible only if your holding period is more than 3Y, in your case, you are going to sell in 2Y. then how can you claim tax benefit on sell amount?

    If the idea is to live near your office, why are you taking the long route & not opting the easy route – purchasing right away?

    thanks

    Ashal

    1. Ashish says:

      Hi Ashal,
      This apartment is close to my wife’s workplace and I’m also looking to shift to this area. If that doesn’t happen (and also if my plans to resign) then I may look at selling…it is just a possibility.
      Anyway, coming back to the question – what do you suggest is the best option – full cash payment vs (40L cash + 30L loan) vs (min cash + max loan + invest cash in property / keep in maxgain)…Need some suggestions that is financially beneficial.
      – Ashish

  4. Dear Ashish, what about tax liability in next 2-3Y sell case?

    thanks

    Ashal

    1. Ashish says:

      Hi Ashal,
      In case I sell it, then I’ll reinvest it in another house. I assume if we re-invest it in house then there’s no tax liability on profit (correct me if I’m wrong)

  5. Dear Ashish, the new house in question is to be used for self consumption or for investment purpose (read Rental income + sell on a profit after few years)?

    Thanks

    Ashal

    1. Ashish says:

      Hi Ashal,
      As of now, the plan is to stay in the new house once it is ready (within a year). Kindly let me know your thoughts on both options – staying as well as rent/sell in 1-2 yrs, because I may look for sell/rent after 1-2 yrs (and buy another close to office) in case some of my other plans do not materilaze
      Thanks, Ashish

  6. you have not considered time value of money .Just saying that you will have to pay 60 lacs for a loan of 30 lacs is not a correct way of looking at it . Because this 60 lacs is spread over 15 yrs . So Dont just add the numbers . paying 60 lacs over 15 yr is same as paying 30 lacs in one shot or near that only.

    Its not that easy to conclude which option is better, but both options have their own Pros and cons .

    One big reason for taking loan can be that bank will make sure that all the checks are done from their side. So if not 30 lacs, take a loan for 8-10 lacs . You also get the tax benefit on that amount.

    The big reason for not taking the loan is obviously that you are debt free, and do not have to think about it . But its fine to have debt if you already have huge investment at some other place which is earning a decent amount.

    You are the best judge for your situation now .

    Manish

    1. Ashish says:

      Thanks Manish. Agree that bank will ensure all checks are done, however I know that the same bank has approved/released loan for the same project for many people which means that from bank’s side things are clear. Also, to get optimal tax benefit, the loan amount should be in the range of 25-30L (this is my understanding), so smaller loan amount doesn’t really give substantial tax benefits.

      I’m actually confused which option is beneficial. For ex. take maximum loan, say 50L, and then invest the cash so that it’ll become more than the total loan repayment amount ie I should get more than 10-11% return there…. or I can put the down payment in MaxGain in SBI…

      Any other thoughts?

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Download Our FREE Ebook!

Available only for first 100 people today

Download Our FREE Ebook!

Available only for first 100 people today