Should You Use All Of Your Savings Or Take Out A Larger Loan When Buying A House?

151

Purchasing a home is seen as a sign of stability and success by the majority of Indians. However, because of the sky-high real estate prices, you will almost certainly need to take out a loan. Shamit isn’t an exception to this rule.

He was a 35-year-old IT worker who wanted to buy a three-bedroom flat in Noida to live with his wife, two young children, and parents. He discovered that a reasonable flat in a decent location in Noida would cost him Rs 1 crore when scouting properties. The minimal down payment for a house is Rs 20 lakh, with the remaining amount financed by a bank loan.

Shamit has already saved Rs 35 lakh over the last five years, among other things, through gold, mutual funds, and fixed deposits. He is still wondering whether to put all of the money down as a down payment or pay the bare minimum and take out a larger loan (as opposed to the amount of loan he would take out if he sold all of his assets to make the downpayment).

In this post, we’ll discuss why selling all of your assets rather than taking out a Home loan to buy a house is a better alternative in this case.

Pros of Using your Savings 

In many ways, using your savings is preferable to borrowing money because you avoid the burden of monthly EMIs and are not in debt to anyone. Here are some additional benefits of spending your own funds:

Interest is no longer an issue.

When you use your saved money in an emergency or for other purposes, like purchasing a home or a household appliance, you avoid having to pay interest on the amount. For example, if you want to buy a phone for Rs. 40, 000 and take out a personal loan to pay for it, you’ll end up paying Rs. 40, 000 plus interest. This is not the case if you use your savings because you can make the complete payment from your savings in one go. As a result, when you save instead of borrowing, the costs of goods and services you pay are lower.

Improves financial prudence

Debts and loans must be paid back with money earned in the future, which encourages irresponsible spending because the future is unclear and appears far away. When you use your own savings, however, the pain of parting with your hard-earned money is greater, especially if the purchase is for a luxury item that is not required. Savings teaches a person to be self-disciplined because they learn to limit their luxury and only buy what they can afford.

Spending is a stress-free activity.

Spending from your own wallet may be a tough pill to swallow, but it helps you avoid the long-term anxiety and stress that comes with repaying a loan. People who aren’t excellent with money might easily get themselves into debt if they aren’t careful with their borrowing, so it’s important to spend only what you can afford right now.

Credit scores are no longer important.

If you use your savings to pay a bill or make a purchase, your credit score becomes useless and has no influence on your spending capacity. This is not the case with loans, as most banks demand consumers to have excellent credit scores in order to get approved.

The Drawbacks of Using Your Savings

People frequently spend a significant portion of their lives saving money, which is why they should think twice before spending it all. Here are some disadvantages of using your money to pay for an unexpected purchase or bill:

Your ability to save restricts your purchasing power.

One of the most significant disadvantages of saving is that a person can only spend the money they have saved. In this case, a person’s wants will be limited by the quantity of money they have in their savings account. As a result, if an emergency arises that necessitates increased spending, depending on savings will not suffice.

A lengthy procedure

Few people maintain all of their money in a bank account; instead, they invest it in various forms such as stocks, bonds, mutual funds, real estate, and gold. While these are safe investments, accessing their liquidity when needed normally takes a few days. As a result, if you need the money right away, raiding your savings account might not be the ideal option.

Future plans are jeopardized.

If you’ve been saving for years with the intention of purchasing a car or a home, it may be tough to use your savings without jeopardizing your long-term objectives. In these circumstances, a best home loan might be more appropriate. Although it will cost you extra, you will still be able to stick to your schedule.

It discourages people from saving money in the future.

People who are compelled to spend all of their savings in one go may be discouraged from starting over. People may come to discount the importance of saving money and engage in risky spending practices. This may make it more difficult to recover from the setback.