Jackie’s Journaling: Day 73 – Concepts in Mortgages (2)

This post is a continuation of the series of posts that I have been writing on explaining concepts pertaining to Housing Loans. Like indicated previously, this series of articles will be useful for anyone wishing to understand the Housing landscape from the lending and borrowing perspective. For folks aspiring to make a career in this area, it can serve as a starting point to check whether you enjoy this kind of content and associate work. For prospective or current home buyers, who are wishing to walk down the route of taking a bank loan, this knowledge will help you have an informed conversation with your Financer.

This is dispatch 2 in the series. In case you haven’t checked out Dispatch 1, I would strongly urge you to do so. Here’s the link. In Dispatch 1, we covered the covered the basics of what is a home loan and what are the different kinds of Home Loans available. In today’s Dispatch 2, we’ll walk down the path to understand:

1.??????What metrics to evaluate when deciding to take home loan?

2.??????What are the tax benefits associated with a Housing Loan?

Let’s get going then, shall we.

I.??What are the factors to consider when deciding to take a Home Loan?

There is immense content available on the internet attempting to answer this question. It’s one of those things, where every person claims some expertise and professes a view and opinion that is the best. I’ll be guilty of doing the same now, so I seek your indulgence please. The factors involved in deciding to take a home loan can be bucketed into 2 categories: (A) Emotional factors, and (B) Financial Factors.

(A)?Emotional Factors: Owning a house is probably the single largest purchase a person makes in her life. No cost benefit analysis can put a value to the emotional high of owning your own house. The emotional high varies across demographics. The value placed on having your owned roof above your head, and thereby securing your family’s future, differs from household to household. Long story short, Emotional Factors are the single largest reason for people to avail a Home Loan. Disclaimer: I personally not subscribe to this school of thought. My personal disposition is inclined towards rent against buy; and this is because the emotional value placed on owning my own house is minimal.

(B)?Financial Factors:

a.??????Loan vs No Loan: As a rule of thumb, it mostly works out better to purchase a house without a loan (if your financial situation permits). Given the nature of Home Loans (high tenure loans – easily spanning more than 15 years), the amount you end up paying in interest is much higher than you anticipate.

b.?????If Loan, then how to select: Purchase without a loan is utopian for many people given the huge amounts of capital required to be locked in. Given that you will invariably be taking a loan, here are some key considerations for the decision:

????????????????????i.?????Rate of interest: pick the offering with the lower rate of interest.

???????????????????ii.?????Fixed vs Floating rate: usually better to go with Floating interest rates. More on this in a later dispatch

??????????????????iii.?????Processing Fees and Other Charges: While taking a Home Loan, there are several other associated charges such as Processing Fees, Stamp Duty, Registration Charges, etc. Pick the option where these fees and charges are minimal. Specifically check for Foreclosure charges; regulatory guidelines prevent foreclosure charges on typical Home Loans. Be mindful that the terms and conditions of your loan doesn’t have any such hidden charges.

c.??????Maintain a healthy ratio of Down Payment to Loan Amount: The lower your loan amount, the lower will be the interest amount accrued. Look to putting in at least 35% of the entire value as Down Payment; the balance 65% can be financed through a loan. ?

d.?????If under construction, check for Pre-EMI Period: Pre EMI period is when you are required only to repay the interest portion of loan. It is usually provided for under construction property types where you service the interest part only. This is a lucrative option available in case you have cash flow constraints; however it leads to the tenure and overall repayment amount of loan being higher as compared to if you would started paying EMI from Day 1 itself.

II.??What are the tax benefits associated with a Housing Loan?

This is another key reason why folks opt for Home Loans, there are several tax benefits associated with it. Tax treatment of home loans vary from year to year, what I will be sharing now are tax benefits as on November, 2022.

(A)???Principal Repayment

a.???????Section 80C: Home buyer can claim upto Rs. 1.5 lakh deduction under this section on account of Principal repayment. Your taxable income can reduce by upto 1.5 lakh, assuming that your principal repayment for the year is as much or higher. In case Principal repayment is lower, then stamp duty and registration charges maybe included in this to avail the tax benefit. This benefit can be claimed for self-occupied and let-out properties. Note: if you are already maxing out your 80C through PF, PPF and ELSS, then this benefit of Home Loan tax benefit is only notional.

(B)???Interest Repayment

a.???????Section 24: This section of the Income Tax Act allows homeowners claim a deduction of up to Rs. 2 lakhs on their home loan interest if residing in the house property. The entire interest is waived off as a deduction when the house is on rent.

b.??????Section 80EE: This deduction is available if the cost of the property is not more than Rs. 50 Lakhs and the amount of the loan taken is upto Rs. 35 Lakhs. Also, the loan should have been availed between 1st April 2016 and 31st March 2017. This deduction is capped at Rs. 50,000/- for a year. It provides deduction only for the interest portion of loan.

c.???????Section 80 EEA: Income Tax benefits upto INR 1.5 lakh on the home loan interest paid. What this means is that the interest that you pay on Home Loan, upto 1.5 lakh of it annually is removed from your taxable income, thereby reducing your taxable income by this amount. This benefit is applicable only for loans availed upto 31st March 2022. From FY23 onwards, this scheme has been sun-setted.

A key point to note when availing Home Loan is making your spouse a co-owner. If your partner is a co-owner, then both of you can claim tax benefits on repayment of the Housing Loan.

That’s all for this Dispatch 2. Do write back sharing your comments and feedback. In the next dispatch, we will cover: What is the difference between Fixed and Floating Rates of Interest? Which is a better option to choose? We will also cover What are the different kinds of Mortgages possible in India? Which of these are most common?