Taking Home loan is a good Personal Financial Planning

You want to invest in properties. You can invest your money fully or partially. You need to decide the amount of loan you should take to maximize your return.
If You want to stay Debt free, You may decide to finance the house but most of the time this is not good financial decision .

Are you taking a wise decision by not taking house loan?

There are two options

Option 1: Take the entire amount as home loan with 9% p.a. interest for 15 years.
Option 2:Fund the entire amount from your pocket

If you invest the entire amount to buy the home, you are not allowing your money to work for you. If you take home loan, you will pay fixed interest every month as per the terms of your mortgage.

For any financial investment, you need to find which option provides more return of investment in the long run.

Why you should take home loan?

1. If you take home loan, you will get tax benefits. So tax laws favors it.

2. Lets assume you purchased an apartment of US$ 100000 with 10% down payment and interest 9% p.a. After 1 year, the price of the asset is appreciated to US$ 120000. Your profit will be US$ 20000 against your initial down payment US$ 10000. Even after considering interest and tax, your return of investment will be more than 30%. Its a high yield investment. This is much safe than stock market investment.

3. If you rent the apartment, You only need to earn more rent than your monthly operating expense. This is called cash in cash or positively geared asset.
Eventually, if you sell the apartment after 5 or 6 years, you will pocket the entire amount. Probably after 5 years, you won't pay any capital tax. It is a good process for wealth building.

4. Lets assume the you take a loan of US$ 90000 for the residential property and after 5 years, the cost of the house appreciated to US$ 170000. You take home equity loan from your lending institute. This additional money is tax free. You can invest this money for property investment or any
other investment.

Cash flow and tax deduction for home loan

This is important to decide should you mortgage or not. Lets assume for a property of Rs. 2
million, you take the entire amount as loan with 9% pa for 15 years. You invest your own
fund Rs. 2 million fully with post tax return 5% and your Your tax bracket is 30%+.

You need to pay EMI Rs. 248118 p.a.
In first year you need to pay Rs.180000 as interest and principal repayment is Rs.68118.

Let's assume housing loan interest amount is tax deductible to the extent of Rs.150000 per annum.
Therefore, at a 30% tax rate, the advantage works out to be Rs.45000.

If there is a similar benefit for principal payment, you can get a tax advantage Rs.20435.

Remember any tax deduction is money earned. You earned after 1st year Rs.45000+ RS. 20435 i.e.65435.

Break Even point calculation for taking home loan?

Lets assume you invest Rs.2 million in a portfolio. Lets assume the post tax return of this portfolio is 4.44 %. You will receive Rs.88791 as interest and cash flow will be
Rs.26637.

If you consider cash inflows and cash outflows over 15 years and you reached zero-balance after 15 years as per existing tax laws you will be indifferent in buying the house with far
home loan or own fund remains same.

Breakeven point for a home loan with 9% pa interest for a duration of 15 years
For 30% income tax bracket post tax return comes to be 4.44%
If you are in 20% tax zone, your fund need to earn 6% p.a.
If you are in 10% tax zone, you need to earn 7.6 % p.a. to break even.

More advantages on house loan

In case it is not self occupied there is no upper limit on interest payment in some
countries tax law. In legal way you can do tax avoidance by taking house loan, either by
residential property investment or commercial property investment.
This is very good opportunity to get rich with other people money.

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