Q: Hi Adhil. I’ve been planning to buy a home for a while now and have recently received an inheritance gift that could be sufficient to fund my home purchase. So, I’m actually contemplating buying a house without the help of a home loan. Do you think it’s a good idea? – Kalpesh
Ans: Hi there. If your funds can accommodate your home-buying costs, you should certainly consider the idea. A home loan helps a majority of people realise their dream of buying a house who usually do not have sufficient funds to buy it through their own savings and investment returns. However, not taking the home loan route would also mean you’ll save a considerable amount on money in interest obligation to buy an appreciating asset.
That being said, before finalising your decision, here are a few things you also need to consider:
Firstly, check whether your personal funds would be enough to buy a house that meets all your critical requirements. You can compromise on a few things to reduce your home-buying costs, but you cannot ignore all your requirements and expectations pertaining to, say, the ideal size or the location of the property. If you feel buying your shortlisted property through self-funding would exert unnecessary pressure on your finances, or would lead to a depletion of your emergency savings or funds for other equally critical financial goals (like children’s higher education, wedding or your retirement fund), you may want to take a home loan for a portion of the home-buying expenses at a lower loan-to-value (LTV) ratio and keep aside a substantial sum for other important financial commitments.
Secondly, the actual expenses of home-buying often exceed our initial budget because of miscellaneous expenses like registration, stamp duty, GST, interior decoration, etc. You should factor in all these charges while finalising your decision. And if you feel you’ll fall short, you might want to finance a portion of the expenses.
The point being, buying a home is an extremely important financial goal, however, it’s not the only critical goal you need to take care of. You should take the 100% self-funding route only when doing so doesn’t impact your other goals or leaves your finances vulnerable, especially during these pandemic-stricken times of heightened uncertainties. Financing a portion of the expenses could also make sense assuming you have the necessary repayment capacity, and considering the fact that home loan interest rates are currently at multi-decade lows. However, the best rates are ensured for those with credit scores above 750, so check if you’re there in order to get the best loan offers. This is an extremely important financial decision, and I hope you weigh the pros and cons of both the options carefully, and evaluate the impact of each on your finances before taking the plunge.
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards. Image courtesy: Freepik
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