Buying A Home – Should You Use All Your Savings Or Take A Bigger Loan?

For most Indians, buying a home is considered a sign of settling down and progress. However, the sky-high real estate prices mean, you will have to take a loan in most cases. Shamit, is no exception to this

A 35-year-old IT professional, he wanted to buy a 3-bhk apartment in Noida where he would be staying with his wife, two young children and his parents. While scouting houses, he found out a decent apartment in a decent location in Noida would cost him Rs 1 crore. The minimum requirement for the down payment of the house is Rs 20 lakh, the rest would be covered by a bank loan. 

Now, Shamit has saved Rs 35 lakh – across gold, mutual fund, FD etc – in the last few years. But, he is still contemplating whether to put all the money as the down payment, or pay the minimum required amount and go for a bigger loan (as compared to the amount of loan he would be availing if he would sell all his assets to make the downpayment) to make the purchase. 

In this blog, we will help you understand, under such a circumstance, which is a better option – sell all your assets or take a larger loan for buying a house?

The argument – should you opt for a bigger loan or liquidate asset?

To explain this, let’s talk about two different scenarios. In the first case, he sells only Rs 20 lakh from his existing assets – FD, gold etc – to put down as the downpayment of the house and takes a loan for the rest of the amount. He keeps his Rs 15 lakh mutual fund investments intact. And in the second case, he liquidates all his assets and pays the total of Rs 35 lakh as the downpayment of the house. 

Scenario 1: Shamit uses savings to pay only the required downpayment and opts for a higher loan amount

Shamit puts Rs 20 lakh from his pocket as a downpayment and takes a Rs 80 lakh loan for 20 years from a bank to make the purchase. Accordingly let’s calculate how much he pays, considering the interest amount to be 8 percent, for a 20-year housing loan. 

So in 20 years, Shamit will pay the bank Rs 1.6 crore for a Rs 80 lakh loan. 

Now, considering that a home loan comes with certain tax benefits, let’s look at the benefits he will be able to avail for taking the loan.

Tax benefit for taking a housing

Apart from this, he can claim up to Rs 2 lakh on the interest amount under Section 24 every year.

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