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Home / Money / Q&a /  Looking to buy a residential property priced 1 cr. Shall we take full loan of 90 lakh or utilize savings of 40 lakh
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We are looking to buy a residential property for our own use with a budget of 1 cr. We are staying in rented accommodation and paying 28,000 p.m. as rentals. We are eligible for a housing loan to the tune of 90 lakh and can comfortably cover the EMI.

Is it advisable to take a full loan of 90 lakh or to utilize surplus funds available of 40 lakh and take a loan of the remaining 50 lakhs keeping in view the all time low-interest rates on housing loans and liquidity position. My age is 47, my spouse is 51 and my only child is 20 years old and studying. We both are in service.

Nidhi

The question in your mind is an important one and there are certain aspects that you and your family should consider before deciding on the next step. Ideally, you may be thinking of a 10 to 15 years loan tenure and in such a case the EMI for a 90 Lakhs home loan could be around Rs.1.05 Lakhs or Rs.81,000 respectively at a 7% p.a. interest rate. Similarly, the loan amount of 50 Lakhs will have an approx. EMI of Rs.58,000 or Rs.45,000 for a tenure of 10 and 15 years respectively. You and your spouse will have to look into other monthly commitments as well before deciding the loan amount and its tenure.

At present the interest rates are low and this could be a good reason for your to opt for the maximum loan amount as you can earn higher returns from the surplus if you invest it in equity. However, you may keep an eye on the home loan interest rate and you may rework this strategy when you notice any major increase in the interest rate. You will also have to consider where your existing surplus of Rs.40 Lakhs is invested and is this money assigned to any other objective like your child’s further education or your retirement.

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

Scenario 1:

Home Loan Amount – 90L

Loan Tenure – 10 Years

Rate of Interest – 7% p.a.

Your EMI in this case will be approx. Rs.1.05 Lakhs and if we assume the surplus of Rs.40 Lakhs is invested in equity for your retirement or wealth creation then at 10% p.a. return you could have a corpus of Rs. 1.04 Cr. after 10 years. Along with this you and your spouse will be able to take complete tax benefit on home loan interest repayment under section 24 of Income Tax up to 6 years and then the interest component may go below Rs.4 Lakhs per year (Rs.2 Lakh each).

Scenario 2:

Home Loan Amount – 50L

Loan Tenure – 10 Years

Rate of Interest – 7% p.a.

Here, your EMI will be approx. Rs.58,000 and you will use the surplus of Rs.40 Lakhs to reduce the loan amount. Since the EMI is low compared to the loan of Rs.90 Lakhs, the difference in EMI i.e. Rs.47,000 every month can be invested in equity for 10 years, this will help you create a corpus of Rs.95 Lakhs. At the same time, you and your spouse will have the tax benefit under section 24 of Income Tax below Rs. 4 Lakhs (Rs.2 Lakh each) right from the first year.

Looking at both scenarios in my view taking a home loan of Rs.90 Lakhs may work better in present conditions if your finance permits you to take a higher EMI. In both scenarios, your existing rent will no longer exist and will help you in reducing the EMI burden anyways

Harshad Chetanwala, founder MyWealthGrowth.com

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