The Pros and Cons of Home Loan - Home Loan Stories

The idea of owning a house at a low interest rate is so pleasant that most people see no reason not to avail of a home loan. These loans fulfil dreams, especially of young couples, since they allow people to own a house quickly. However, almost nothing in life comes without cons. Therefore, here are a few of the pros and cons surrounding home loans that will enhance your understanding of this financial instrument:

Pros

Sense of accomplishment: Let's admit it. The satisfaction of owning a house in your asset column is no less gratifying than a promotion that you get after years of hard work. Buying your home is likely to be one of the largest financial decisions you will make in your life. And that's not just because of the emotional value, but also its increasing market value.
Low interest rates: Low home loan interest rates make home loans very attractive to potential buyers. Also, it is easy to get these loans as by their nature, they are approved in lieu of a collateral or asset.
Flexible tenure: Repaying your home loan is easier with flexible tenures offered by various banks.
Tax benefits on principal repayments: Up to Rs. 1.5 lakh as principal repayment on your home loan will be allowed as a tax deduction under U/S 80C and 80CCE of the IT Act of 1961 if it’s a first home. In case of second home or under construction properties, tax benefits on principal repayments will not be applicable.
Tax benefits on interest paid: Tax benefits on interest paid vary depending on self-occupied or let out property or if the property is under construction.

Summary of tax benefits on principal and interest paid is as below:

Tax Benefits

On Principal Repaid

On Interest Paid

First Home -Self Occupied

Actual principal repaid subject to a maximum of Rs. 1,50,000 (Rs. 2 lakh for senior citizens) can be claimed as investment eligible for tax deduction under section 80C.

Actual home loan interest paid subject to a maximum of Rs. 2 lakh (Rs. 3 lakh for senior citizens) if house construction completed within 5 years from the end of the financial year in which loan is taken
If construction of house not completed within five years then Rs. 30,000 is tax exempt
Additional exemption of upto Rs. 50,000 on interest paid for loans upto Rs. 35 lakh with cost of home upto Rs. 50 lakh.

First Home – Rented/ Vacant (deemed to be let out property)

Upto Rs. 1,50,000 (Rs. 2 lakh for senior citizens) eligible for tax deduction under Section 80 C. The deduction is available only if the property owner is staying in a different city for work.

Exemption on interest is capped at lower of two, a) Rs. 2,00,000 or b) actual interest paid for all properties owned by a tax payer.

Second Home or Additional Property

None

Exemption on interest is capped at lower of two, a) Rs. 2,00,000 or b) actual interest paid for all properties owned by a tax payer

Under Construction Property

None

The interest paid can be claimed in equal parts in five financial years post completion or handing over of property within the overall annual limit of Rs. 2 lakh.

Cons

Long-term commitment: The deduction of EMIs (monthly instalments) can last 10-15 years, which can become a serious pain point. Home loans impose a major burden on personal finances.
Property Appreciation: Due to fluctuations in real-estate market, the property purchased might not give the expected returns.

These are a few of the positives and negatives of home loans. Think about them carefully before you avail of a home loan. This will help you to remain profitable.

Disclaimer: Copyright Kotak Mahindra Bank Ltd.