Homeownership is an important life goal for almost every household. However, buying a home can appear an out of budget option for many, except when you plan well for it.
So, the best option for you is to start planning on buying your first house as soon as possible. You have basically two options –
- Save the entire cost of buying and pay everything out of your pocket.
- Save only for the down payment and finance the rest through a home loan.
Both have their own pros and cons. However, there is no straightforward comparison that can put one option over the other. However, there are a few aspects which give impetus to the home loan option over investments.
1) What Do You Want to Own?
Before you can create any plan for buying the house, you need to select the type of property you would like to own. You may want a 3 BHK or larger house, and accordingly, the cost of ownership goes up. That will mean either a longer waiting period or higher investments to achieve the goal.
Also, when the cost of the property is high, a home loan makes more sense. With a home loan, you need to save for about 20 to 25% of the total cost of the property. The loan will take care of the rest.
2) Start Investing
With the home loan option in place, you may only need to save as much as 20 lakhs or less (assuming the price of the property after inflation will be about Rs. 1 Crore when you go to buy it in a couple of years). Depending on your annual investing capacity, you can achieve this goal anywhere within 5 to 10 years.
Remember the higher is the down payment, the smaller is the EMI, which means the lower is the stress over your monthly budget. Also, if you are planning to enhance the amount for your down payment, you may even go for a better property.
3) Investing for Home Buying Goal
Whether you want to save only for down payment or for the entire cost of the house, your investment choice should be tax efficient and offer a good balance between risk and return.
There are few investments that qualify these criteria, ELSS funds and ULIPs. ELSS funds are provided by mutual fund houses and life insurance companies offer the ULIP policies.
However, if you consider the risk angle, ELSS may scoreless since they are pure equity investments. Thus, to balance your risk, you will need a separate debt fund, which is going to attract tax on maturity value.
However, ULIP policies fare better in this aspect, as you can invest partially in an equity fund and a debt fund (safer option). Regardless of your fund choice, you enjoy the tax-exempt status of ULIPs. You can even switch between the funds if you see a good market opportunity, without additional cost.
4) No Need to Completely Liquidate ULIPs
With ULIP investments you can continue the ULIP policy even after your goal is met. ULIP benefits include guaranteed additions for investors who can stay invested for long.
Additionally, if you have surplus funds in your ULIP plan, there is no need to withdraw completely and stop the investment. Continue the plan and let the money grow further.
5) Buying Home Will Save You Tax
Every young and old investor knows the fact that buying a home can save their tax money if they invest in real estate. If you are using the home loan to purchase your house, you can enjoy deductions under section 80C and 24B.
You can claim the home loan principle that you repaid in the financial year as a deduction under section 80C, while section 24B allows deduction of the interest paid. Thus, with a home loan, you can improve your tax deduction limit from Rs. 1,50,000 to Rs. 3,50,000 (Rs. 2,00,000 for interest paid).
First Time Home Buyers
The government has several benefits for the first-time home buyers, in the form of interest subsidy on a home loan, and up to 90% of the financing option. If you are married and your spouse is also working, you can even consider joint loan and purchase of the property.
There have been several subsidies and schemes introduced for home buyers. With RERA and flexible funding schemes in place, it is far easier to own a home than ever before.