In India, debt is normally frowned upon. It is like the famous advice given by Polonius to his son, “Neither a borrower, nor a lender be.” However, home loans can be an exception as they come with a number of home loan benefits. One of the many advantages of home loans is that – being secured assets – they entail a lower cost. Also, they give a slew of tax benefits which reduces the effective cost of owning a house.
Today, it is almost impossible for anyone to entirely fund a home purchase with their own resources. That may be possible for the creamy layer, but for the general population, the best option to own their dream home is to take a home loan from a bank or a housing finance company (HFC). The good news is that there are several additional home loan benefits. Here is a quick look at the 4 major advantages of home loans.
1) Home loans offer tax advantages
When you calculate the effective cost of the home loan, do not just look at the interest and EMI. Also, look at tax benefits as the home loan can reduce your tax burden substantially. There are 2 principal tax benefits of home loans.
- Under Section 24 of the Income Tax Act, the home loan borrower can avail an exemption on interest paid on home loan up to Rs2 lakhs per year for self-occupied properties. It can be higher for leased out property.
- The principal portion of the EMI is eligible for deduction under Section 80C of the Income Tax Act. This is part of the overall umbrella limit of Rs1.50 lakhs. Both these exemptions can substantially reduce the effective cost of the home loan.
2) Lower cost, longer tenure
These are two specific advantages of home loans. The interest cost on home loans is normally lower than other loans as it is secured by hypothecation of property in favour of the lender, meaning the house itself is pledged as collateral security to the lender. The cost of a home loan is not only lower than unsecured loans, but also lower compared to car loans or other asset-backed loans. This keeps overall cost in check. This is one of the key home loan benefits.
The other benefit is longer tenure. Your typical home loan can extend from 10 years to 30 years. This is the most popular tenure. To attract young people to buy homes, HFCs are also extending 40-year loans. However, longer the tenure, higher is the eventual rupee interest you pay to the bank. Keep that in your calculations.
3) Flexibility in managing the home loan
This is once again a unique advantage that only comes with home loans. For example, after completing a basic minimum tenure of the home loan, you can prepay the home loan without any prepayment or foreclosure charges. This is in contrast to personal loans, where prepayment comes with penalty. Most home loans offer the flexibility of part payments or balloon payments. The borrower can then choose to either reduce subsequent EMIs or to shorten the tenure of the home loan. Either way, it is a home loan benefit.
One of the many advantages of home loans is that the bank permits add-on loans like top-up loans, asset purchase loans, furnishing loans and most of them are at a reasonable cost. Quite often, based on the track record, banks also offer other loan benefits for specific expenses of a long term nature. Whether you want to avail these facilities or not is your choice, but the choice is always there. You can even transfer the balance to a lower cost option, either within the same lender or to another lender.
4) Positive equity is a long term wealth creator
The value of an asset typically appreciates over time, and property is one such asset. It is very rare to see home prices falling like the prices of stocks or bonds. That is what creates positive equity. Here positive equity is a situation wherein the market value of the property is always more than the outstanding loan amount. That makes the loan a viable proposition for you. The risk to the lender is also lower in such cases due to positive equity. Above all, the borrower knows that his asset value has net positive value.
In terms of joint application, the advantage of home loans is indisputable. A thumb rule to make the best of your home loan application is to make joint application as you can enhance the income matrix and get a higher limit sanctioned. Also, tax benefits can be doubled, in case both spouses are earning members.