When buying a home, the dilemma of bigger home loan vs using up savings is common. To find out the best option, you must understand the implications of your choice on your financial health and future goals. Here are some factors you must consider before making the decision.
- Financial security
Availing a bigger loan could mean you have significant savings in your pocket. Having savings at your disposal gives a sense of financial security. You never know when you might need some extra bucks for any emergencies. If you drain all your savings towards home loan down payment, you might face financial restrictions during the tenure.
- Income level
Consider your income while choosing between the two. Lenders do not approve a high loan amount if you do not have enough income to assure them of your repayment capacity. Similarly, availing a bigger home loan might not be a good idea if you are already servicing other debts. It is because, a higher EMI could increase your debt to income ratio and even lower your credit score. So, with a low income, it could be better to use your savings and accumulated wealth to pay a higher down payment.
A bigger loan helps you to use your savings for investments. Investing the savings can help you earn returns. It can even help you repay the loan. Diversified investment vehicles like mutual funds can help you earn significant returns over a longer duration.
Here’s an example to understand it better.
Mr. Ajay and Mr. Vivek chose a house costing Rs 1 crore in a residential society. They planned to avail a home loan and decided to pay the down payment from the savings of Rs 45 lakhs they both had. Mr. Ajay opted to pay a down payment of Rs 25 lakh while availing a higher loan amount of Rs 75 lakh. He used the remaining Rs 20 lakh to invest in mutual funds. Mr. Vivek used all his savings and paid a down payment of Rs 40 lakh with a home loan of Rs 60 lakh.
At the end of the tenure, Mr. Ajay paid home loan EMI of Rs 63,000 per month and Rs 1,51,20,000 as the total repayment amount. However, he also earned Rs 1,44,00,000 as returns from mutual funds at 12% rate of return.
On the other hand, Mr. Vivek paid an EMI of Rs 50,000 per month and a total amount of Rs 1,20,00,000. However, he had no earnings from returns.
Whether you choose to avail a bigger loan or use your savings, you must consider your financial stability and income. By not using up all your savings towards making the down payment, you may have to take a bigger loan, but you might earn profitable investment returns. It could also allow you to have some liquid savings in your hand that you can use for catering to financial emergencies.