Home Loans vs Upfront Payment - Home Loan is Better

Being a proud homeowner is a cherished dream for most Indians. But the struggle begins when it comes to financing that dream. Most first-time and even experienced homebuyers are faced with a critical dilemma - whether to pay upfront or apply for a home loan. 

There’s no denying that the allure of immediate ownership and debt-free living with an upfront payment is tempting, but a home loan offers a surprising range of benefits that is impossible with an upfront payment. Don’t believe us? Continue reading to understand why leveraging a home loan is a smarter financial decision, even if you have the cash ready for your new home. 

Upfront payment - A straightforward approach, but with limitations 

Yes, we understand how upfront payment might appear attractive. After all, it is saving you from the pressures of EMIs and interest payments. 

However, the limitations of this approach are apparent once you delve deep. 

• Exhaustion of savings 

Paying upfront for a home often means using a large portion of your savings. As a result, you are left with very little to no liquidity for investments, emergencies, or other financial goals like healthcare, education, or retirement planning. 

Since we are living in an unpredictable world, it is a risky move to deplete all your savings for buying a home. 

• The opportunity cost of capital 

You pay for the opportunity cost by spending all or most of your savings and don’t have any money left to invest elsewhere. For instance, if you put the same money into an equity or mutual fund, then you would be able to get returns on those other financial instruments that easily outstrip the cost of borrowing a home loan.

• Tax benefits loss

Unlike home loans, upfront payment has no tax benefits. In India, home loan borrowers can claim a tax deduction under Section 80C (principal repayment) and Section 24(b) (interest repayment). This can reduce your taxable income by up to ₹3.5 lakh a year, which is substantial savings.

• Real estate liquidity challenges 

Property is an illiquid asset. If you invest all your savings in a home, it may be challenging to convert it back to cash in case of an emergency. Unlike financial investments, selling property is time-consuming and may result in losses during a market downturn.

• Effective use of your finance

Home loans let you purchase your dream home without dipping your savings. With competitive interest rates being offered by banks and other financial institutions, this financing can be a great way to maintain a balance between your financial savings and owning a property.

For example, you might save ₹1 crore to buy a house but instead pay only 20% as a down payment (₹20 lakh) and finance the rest through a home loan. This amount can be invested in diversified financial instruments, which will allow your wealth to grow over time.

• Tax benefits and financial efficiency 

Home loans come with significant tax benefits that reduce the total cost of borrowing. Here’s how:

1. Principal Repayment: Up to ₹1.5 lakh available as a deduction under Section 80C, Income Tax Act.
2. Interest Repayment: Deduction of up to ₹2 lakh under Section 24(b) on interest paid.

These aren't just deductions from your taxed income but also help make home loan borrowing more economical than it otherwise would appear.

• Credit score improvement 

Regular and timely repayment of home loan EMIs helps build a strong credit history. A high credit score increases your financial credibility, making it easier to secure loans or credit facilities in the future at favorable terms.

• Inflation and asset appreciation 

Real estate, generally, appreciates over time, especially in urban and semi-urban areas. Along with inflation helping your cause, the actual cost of a home loan diminishes over the years since your income is bound to grow. Almost surely, by the time you finish repaying the loan, the property's value has appreciated manifold, hence ensuring good returns on your investment.

• Flexible loan structures 

Financial institutions of India offer flexible home loan options according to the needs of different borrowers. Features, such as prepayment options, balance transfer facilities, and step-up EMIs, ensure that the loan aligns with your financial situation at every stage.

• Opportunity to preserve liquidity for emergencies or investments 

With a home loan, you can ensure that you have liquidity in case of a sudden financial emergency or want to invest in an available opportunity. Be it a medical bill, investing in a new business, or an investment opportunity in an emerging sector, keeping your savings intact will give you the freedom to adapt to various changes around you.

Comparison - Upfront payment vs. home loan 

Let’s look at a comparison to understand the financial impact of home loans versus upfront payments.

Counterarguments and rebuttals

You may still have the following questions on your mind:

• But the interest payments for the home loan are high

True enough that you pay interest on a home loan, but tax benefits and the opportunity to invest your saved capital in higher-yielding assets often offset these costs. Prepayment options also reduce the overall interest outflow.

• Why should I take on debt when I can avoid it by paying upfront?

Debt is not bad if managed well. A home loan is a good debt in that it leverages you for an appreciating asset. With structured repayment and a low interest, it is financially more judicious compared to using the money from savings.

• Property prices may fall!

Real estate prices may fluctuate in the short run; however, property, on average, appreciates in the long run in India, especially in high-demand areas. More importantly, taking a loan ensures you aren't over-leveraged and can better manage risks associated with market changes.

Final verdict: home loans triumph over upfront payments as a tool for building long-term wealth while becoming a proud homeowner.