When it comes to buying a house, the potential buyer is faced with some hard decisions to make. Should I take a home loan or should I use my own money? What are the advantages if I use cash and what are the advantages if I use a home loan? If I am to use a home loan, who should I avail it from? What factors do I need to consider when availing a home loan? These are a few questions that trouble the mind of a potential buyer.
There is a cost attached to using home loan funds for purchasing a house and using your cash for purchasing a house comes at a price. You have to assess and calculate which source of funds is cheaper and more aligned with your long term goals. You will also have to consider when is a good time to avail a home loan to purchase a house, for your concern are not the only factors to be considered. There are market conditions also that need to be factored in. This article seeks to address your concerns over the cost of home loan funds and certain conditions that go along with it.
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When is a good time to take a home loan for buying a house?
When taking a home loan, a borrower has to consider several factors like the lender from whom the borrower will avail a loan, interest rates, miscellaneous charges, the quantum of loan required, the tenure of the loan etc. before even contacting a lender for such a loan. A home loan is a long term liability and is accompanied by several costs and charges that can be financially taxing.
- A significant component where the borrower can save money is in interest. A cheaper rate is beneficial. But one should not only consider the interest rates available on the lending options but also the prevailing rates in the market. When the overall rates are low in the market, it is a good time to avail a home loan for low-interest payments.
- Real estate prices are a major factor that influences a borrower’s decisions on the quantum of the loan to be availed. When the real estate prices are falling, it is a good time to purchase a house and by extension a good time to avail a home loan.
- There are times when lenders come out with attractive offers on home loans like sellers with offers on products. Assess and ascertain the favourability of such offers and make your decision. If you find it favourable, it is a good time to avail the home loan to purchase a house.
Do home loans make buying houses more expensive?
A home loan by its very nature is a long term liability availed to purchase a long term asset or make lasting additions to the asset to increase its value. As such, it comes at a cost and has certain charges accompanying it. It is up to the borrower to determine if it is more expensive or cheaper than the alternative sources of funds that can be availed to purchase a house.
- Home loans have a principal amount and an interest component involved that have to be paid in monthly installments. Over the tenure of the sanctioned loan, the quantum of the total loan amount is repaid in the way of these EMIs which may prove expensive as the income of the borrower falls in later years.
- Home loans other than the principal amounts and interest payments are accompanied by several secondary charges like application fee, processing fee, etc., ancillary charges like technical valuation charges, legal fee and charges subject to contingencies like pre-payment charges, balance transfer fee and recovery charges. These charges are one time payments at the time of sailing loans, but they can burn a hole in your pockets.
However, there are some advantages of availing a home loan that may have some cost benefits.
- Availing a home loan for a purchase of a house comes with some tax benefits that serve as deductions under the Income Tax Act, 1961. If your house is self-occupied, you can avail a standard deduction of maximum Rs. 2 lakh on the loan amount repaid in an assessment/financial year under Section 24 of the Act. You can also avail a deduction on the amount paid towards the principal amount paid in a year subject to a maximum deduction of Rs 1.5 lakh rupees under the Section 80C of the Act.
- According to the present value concept, provided you ignore the interest component, the present value of money is greater than its future value. Thus, a sum of money paid today is worth more than the sum of money paid in the future. If one considers this, rather than paying a great quantum of money in a single payment to purchase a house, the financial strain of paying in installments is lesser. Rather than drastically reducing your cash reserves for purchasing a single major asset, you can use that money to invest in diverse areas.
Therefore, these advantages and disadvantages have to be carefully weighed to ascertain the cost of home loan funds and determine its effect on your financial status.
Can I get a home loan against Patta land for buying a house?
A Patta is a legal document issued by the Government establishing the ownership of a particular person over a particular piece of land. This is a very document that serves as a record of ownership. This document is also issued to protect the rights of ownership of the owner. You get the land registered in your name and get a Patta from the Tahsildar’s office in your district.
- Availing a home loan against Patta land is difficult unless you are the actual owner of the land and have the Patta in your name.
- If you do not have the Patta in your name, you have to deal with the actual owner who has such a Patta. You have to apply to Tahsildar to get the Patta land transferred to your name. These procedures take a long time because the Government authorities survey and investigate land holdings and scrutinize documents of ownership before registration. Bureaucratic apathy is also a contributing factor behind the delay.
- Lenders are usually hesitant to give loans against Patta land for the majority of legal land disputes in India are caused by administrative mismanagement in record keeping. There are also several bureaucratic hurdles faced at different levels. For instance: If you want to build a house in Tamil Nadu, you may need a building permit from the authorities which are tedious.
However, this process is being simplified with states like Karnataka introducing online registration for Patta.
Can I sell the property even when the loan is outstanding?
Yes, you can. But before initiating a deal to sell the property, get your documents related to the property in order. Important documents like the sale/purchase deed and in case of cooperative society members, the share certificate of such a cooperative society, and the sale/purchase deed of the dwelling are important. But, since you have availed of a home loan, the original documents are with the bank. In that case, you can use certified photocopies of the documents to start the sale.
- If the buyer is going to pay cash to purchase the property, it is easier for you. You have to get a letter from the lender containing the lender’s agreement to relinquish the original documents after the full and final payment of the outstanding loan amount. The buyer then has to pay a sum of money equal to the outstanding loan amount to the bank in a final settlement of dues after which he receives a “no due” letter from the bank stating that there are no outstanding dues and then the documents are relinquished.
- However, if the buyer plans to avail a home loan to purchase the house, you need to settle your home loan dues with your lender before you can initiate the deal. Then you can deal with the buyer as to how you wish to sell the dwelling. Transfer of loan under this option from the seller to the buyer is not possible.
- For instance, if the value of the property is Rs 10,00,000 and you have the option of making cash payment or sailing a home loan, the scene will play out like this:
- If you make a direct payment of Rs 10,00,000 in cash, you avoid the liability of present and future installments to be paid over a loan tenure if you had availed a home loan. However, your cash balance may be diminished and a house is an immovable asset that keeps your funds locked.
- If you avail a home loan say for 10,00,000 at 10% interest rate and for a tenure of 10 years then applying the EMI formula:
EMI = P × r × (1 + r) n/ ((1 + r) n – 1)
Where: P = Loan amount, r = interest rate, n = tenure in number of months
Which results in a loan EMI of Rs 13, 215 monthly. The Total Interest payable is Rs 585809 and total amount to be paid towards the loan is Rs 10, 00,000 + Rs 585809= 1585809.
- The loan amount is certainly greater than the cash payment made at one go, but remember, this payment is made in installments of Rs 13215 per month over ten years. Thus, if you are earning you don’t feel the financial brunt at once.
It can be a task when it comes to availing home loans for buying a house. However, there are advantages when it comes to using this source of funds to invest in housing. Concepts like tax benefits and the time value of money are capable of yielding both short term and long term gains.
It is for you to weigh your options carefully and actively seek out information regarding the compliances attached to home loans and the assets in question. An informed decision requires obtaining such information from various legitimate sources and making sense of this information as knowledge to seek out long term gain at minimal financial outflow and risk from home loans.