Should you opt for housing
finance?
By Shiv N. Majumdar
With significant tax benefits and easiest housing finance
terms ever, this question may appear to be a no-brainer. However,
a closer look and a careful consideration may reveal often-missed
aspects, which you cannot afford to overlook.
Like any other loan advanced to you, housing finance allows
you to pre-pone your consumption, enjoyment or acquisition.
It can, no doubt, make your rupee go farther.
However, availing housing finance is not like any other credit
facility allowed to you. It is of a higher magnitude, covers
a much longer period and, therefore, a wrong decision can
hurt your personal finances more grievously.
We look at some of the more important aspects.
If you do not self-occupy:
Acquiring a house property that you do not need would mean
that you look forward to obtaining a financial benefit by
way of investment returns on this house property.
However, rental income (from residential properties as a
return on cost of new properties) is not attractive in most
cities. You can expect only 5-6% per annum as rentals.
Appreciation of properties also does not add much for you,
since stamp duty and registration charges would nullify most
of your gains if you hold the property for a short period.
Only if you are ultra conservative with respect to your risk-preference
levels, would it be appropriate for you to consider this.
The facts of easy housing finance terms or the available tax
benefits would not change the situation much in this regard.
Own funds vs. loan funds:
The world of finance does not gift us anything free as such.
If housing finance rates are low today, so are interest rates
on your savings and deposits.
Therefore, if your own funds are deployed in banks, Public
Provident Fund, National Saving Certificates and the like,
you are not going to have any advantage by availing a housing
finance facility and at the same time keeping your money invested.
In such a case, you will do well to use your own funds rather
than opt for housing finance.
However if you can successfully handle investments, which
entail managing a little higher risk levels but give you higher
returns, availing your housing finance option is worth considering.
A reality check on your tax benefits:
You can avail up to Rs 1.5 lacs of housing loan interest as
deduction from your gross total income for the purpose of
your personal taxation.
Therefore, at today's prevailing rate of around 7.75% per
annum, you can get up to about Rs 20 lacs of housing finance,
interest on which can be fully deducted for your tax computation.
However, since tax rate is 31.5% on your taxable income,
the government is subsidizing only up to this level by way
of your lower tax. The balance 68.5% of your housing loan
interest will have to be met from your after-tax cash flow.
This would restrict the size of housing finance you can avail.
Individuals above Rs 5 lacs of gross total income can get
entitled to a tax rebate on availing a housing finance facility.
Similarly, individuals in the gross total income range of
Rs 1.5-3 lacs can get the higher 20% tax rebate instead of
15% as a result of availing a housing loan option. However,
the real substance of these benefits is too small to consider
in your decision-making.
