My wife, 32, and I, 35, plan to buy a house. The property costs Rs 35 lakh (including the stamp duty and the registration). We have saved Rs 15 lakh for the down payment in the past 4 years. This is more than the margin money we must put in while taking a housing loan. Does it make sense to borrow a lower amount? The banker suggests we borrow 80 per cent of the price. What should we do? Also, if we take a bigger loan, how should we invest the remaining funds?
There is no need to go for a higher loan. It is better to have savings than to borrow.
Remember, the interest you will be paying will be expense for you and income for the bank. Lenders make use of a variety of excuses, like tax benefit, higher returns in other instruments etc. to lure people. While these arguments sound good, the equated monthly instalment you need to pay is a commitment. Also, returns from the instruments may not be assured. And, those that do assure may not return more than the interest you are repaying the loan at. The returns may, at best, be marginally higher than the interest applicable.
Think of it this way: If you have paid for the house fully, would you have mortgaged it and used money obtained thereof to invest? When you are taking a higher loan and investing you are doing the exactly same. Both of these situations impact your balance sheet in a similar way.
Finally, please ensure you have one house (where your family lives), completely debt-free as soon as possible.
The writer is a certified financial planner. The views expressed are his own. Send your queries to email@example.com