Thinking of buying a residential property. Should I take out the entire loan or use the savings?

Is it advisable to take a full loan of 90 lakhs or utilize the additional amount of 40 lakhs and take the balance loan of 50 lakhs considering the all-time low interest rates on housing loans and liquidity position. I am 47 years old, my wife is 51 years old and my only child is 20 years old and studying. We are both in service.

Fund

You have an important question in your mind and there are some aspects that you and your family should consider before deciding on the next step. Ideally, you would be looking at a loan tenure of 10 to 15 years and in such a case the EMI for a home loan of 90 lakhs at 7% annual interest rate could be Rs 1.05 lakh or Rs 81,000 respectively. Similarly, the loan amount of 50 lakhs will be approx. EMIs of Rs 58,000 or Rs 45,000 for tenures of 10 and 15 years respectively. You and your spouse will also need to consider other monthly commitments before deciding on the loan amount and tenure.

Presently the interest rates are low and this can be a good reason for you to opt for the maximum loan amount as you can earn more returns than the surplus if you invest it in equities. However, you can keep an eye on the home loan interest rate and re-work this strategy when you see a significant increase in the interest rate. You also need to consider where your existing Rs 40 lakh is invested and whether this money is earmarked for your child’s further education or any other purpose like your retirement.

Let us look at two scenarios with some calculations to see how both options might work for you.

Scenario 1:

Home Loan Amount – 90L

Loan tenure – 10 years

Interest Rate – 7% p.a.

In this case your EMI will be approx. 1.05 lakhs and if we assume that the surplus of 40 lakhs is invested in equities for your retirement or wealth creation then at 10% per return you can have a corpus of Rs. 1.04 crore after 10 years. With this you and your wife will be able to enjoy full tax benefits on home loan interest repayment under section 24 of Income Tax for 6 years and then the interest component can be less than Rs 4 lakhs (Rs 2 lakhs each) per annum. ,

Scenario 2:

Home Loan Amount – 50 Lakh

Loan tenure – 10 years

Interest Rate – 7% p.a.

Here, your EMI will be approx. 58,000 and you will use the surplus of Rs 40 lakh to reduce the loan amount. Since the EMI is low as compared to the loan of Rs 90 lakh, the difference in EMI i.e. Rs 47,000 every month can be invested in equity for 10 years, this will help you build a corpus of Rs 95 lakh. Also, you and your spouse will receive tax benefits under section 24 of Income Tax on less than Rs. 4 lakh (Rs. 2 lakh each) from the first year itself.

Considering both the situations, in my view, if your finances allow you to take higher EMIs, in the present circumstances, Rs. Taking a home loan of 90 lakhs may work better. In both the cases, your existing rent will no longer exist and will help you reduce the EMI burden anyway

Harshad Chetanwala, Founder MyWealthGrowth.com

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