Why should you buy a house?

I am a middle class Indian, and like any other I have lived all my life in a rented house and if you too are one, you must know the struggles of living in a rented house like the lack of independence , sudden rent hike and so on. Recently I decided to buy a house.

Being middle class, I could not pay the entire amount in a single transaction, so I opted for a house loan which has a low mortgage rate. Although the EMI was substantially higher than my rent , I knew that it would not change in case of increase in market rates unless I wanted to restructure it.

Fixed vs Floating interest rates

I was given an option between floating Interest rates and fixed interest rates. For fixed interest rates the interest was offered 1 to 2 percent higher than the  market rate  but it will remain fixed for the entire tenure of the loan.  Furthermore, charges would be applicable for  prepayment.  For floating interest rates,  the interest rate would change as per the market rate, but there would be no charges applicable for prepayment. I wanted to prepay the loan to reduce my tenure so I opted for a floating interest rate.

About Down payments

For down payment,  I paid more than the bare minimum (which was 20%) , so that I  could  get a better EMI, thereby investing my savings. I got to know about the break up of EMI into principal and interest (known as amortization) and was shocked to know that in the initial few years , a major part of the EMI goes towards interest. So for the first five years , any bonuses that I received were put towards prepayment rather than investment so that my tenure could be reduced . By the end of tenure , the maximum part of EMI is paid towards principal.

Further, the property which I was buying underwent a proper checking by the bank before I bought it. So I was relieved that I was not being scammed which has now become a common recurrence. 

Tax Benefits you get when you buy a house with home loan

Moreover, I got to know about the tax benefits I could avail from getting a home loan. They were

Deduction on Home Loan Interest Under Section 24(b) when you buy a house

– Claim up to Rs 2 lakh tax deduction annually on interest paid

– No limit for rented-out properties 

– Both co-owners can claim Rs 2 lakh each on joint home loans

Deduction on Principal Repaid Under Section 80C 

– Claim up to Rs 1.5 lakh tax deduction annually on principal repaid

– Includes principal component of EMI, stamp duty, registration charges

– Available to each co-owner separately for joint home loans

Flexibility of Home Loans

Also during the tenure the market rates went up , so the interest rates as well as rent rates went up. In a rented house, I would have to worry about paying the increased amount in rent. When I buy a house, where I have to pay EMI, I had the choice to either increase the tenure and give the same amount of EMI or increase the EMI amount, keeping the tenure of the loan constant. I chose the latter since I could afford it and the prior would mean I had to pay more interest (total) than I was paying previously.

Owning a home provides financial stability, security and freedom that renting does not offer. While rent can increase unpredictably, an owned home locks in a fixed monthly EMI for the tenure of the loan.

Opting for a floating rate home loan allows prepayment flexibility to reduce interest costs and loan tenure. Making a higher down payment further decreases the EMI burden.

Tax benefits provide major savings – up to Rs 2 lakh deduction on interest and Rs 1.5 lakh on principal annually. Prepaying with bonuses in the initial years maximizes interest savings.

Even when market rates rise, the EMI remains unchanged offering protection. One has the choice to increase EMI or tenure depending on affordability. Renters have no such protection from hikes.

There is greater independence in designing and modifying your own house compared to a rented place. The bank’s diligence during the home loan process also prevents fraudulent transactions, unlike direct purchase.

Finally, owning a house is a big wealth creator. Property values appreciate over time, enabling owners to build equity and net worth. Renting does not build assets.

Conclusion:(Buy a house?)

To summarize, home ownership provides stability, wealth creation, tax savings, financial protection, independence and security. It insulates you from unpredictable rent hikes. So, buy a house on a home loan to make tremendous financial sense for individuals.

FAQs

Should I get Home loans on Floating Interest rates? Fixed interest rates are fixed for the entire tenure of the loan and is 1 or 2 percent higher than floating interest rates. There is a penalty on prepaying on fixed interest rates. So get a floating interest if you are planning to prepay your loan.

What is amortization of EMI in home loans? Amortization of EMI in home loans is its breakdown into the interest and principal, with early payments largely covering interest and later payments primarily reducing the principal amount. This process continues until the loan is fully paid off.

What is down payment? A down payment is an initial payment made at the time of purchase, typically a percentage of the total purchase price, meant to reduce the amount borrowed and improve loan terms. Its usually around 15-20 percent of the net amount.