Home loan vs. self-funding: Which is better for buying property?

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Knowing the difference between home loan and self-financing

The biggest financial decision while buying a house is whether to take a home loan or self-finance it. A home loan allows you to pay in instalments over years without affecting your liquidity for your other expenditure requirements, while self-financing means making the upfront payment without taking any debt. Both are sharply contrasting regarding their advantages and sacrifices on your income stability, savings, and future plans.

Benefits of taking a home loan

A home loan gives you financial independence. Instead of locking up a large portion of your savings in the property, you can invest your other amount elsewhere that could earn more. Home loans also have a gigantic tax benefit—you are able to deduct principal payment under Section 80C and interest payments under Section 24(b), reducing your total tax burden.

Second, timely repayment of EMIs helps you maintain a good credit history. Complementary interest rates and long tenors (30 years) have made it easy to service a home loan for salaried individuals. A well-structured loan helps you enjoy the benefits of homeownership and liquidity for contingencies or other investments.

When self-funding is suitable

If you are financially well-endowed or have sufficient liquid assets, self-financing can save you from long-term interest payments. You gain full ownership right from the beginning without any involvement of the lender or documentation. This is especially useful for the retired or who wish to remain debt-free.

However, putting all your savings towards buying real estate can take away from you the liquidity to cover unexpected costs or other investment opportunities. It's always a good idea to maintain at least 6–12 months of spending money in an emergency fund before committing to full self-financing.

Finding the balance

The optimal solution is typically to combine the two approaches. You can put down a big down payment, say 40–50 percent of the property's price, to limit loan burden and interest cost, but keep some amount invested or ready for contingencies.

The choice between self-funding and a home loan lies in your risk appetite, cash flow, and financial objectives. If you can comfortably service EMIs, then tax and liquidity advantages of a home loan are there. But if peace of mind and stability in the long run are what you desire, then self-funding would be the better option. The most advisable choice is one which makes you financially stable without giving you sleepless nights towards being a homeowner.