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Should You Pay Mortgage Or Pay By Cash For Real Estate Investment?

Adhil Shetty

Buying a property using your own fund or through bank loan has its own merits and demerits. Read on to know more about both the options.

Should You Pay Mortgage Or Pay By Cash For Real Estate Investment?

Buying a property requires a huge amount of funds. You can either buy a property using your own fund or acquire a property by paying through a Bank Loan by mortgaging such property.

Both the options for buying a property have their own merits and demerits. Let’s check out the situations under which a person should buy a property by using own fund, or by using the loan fund.

When To Buy Real Estate By Paying Cash/Own Fund?

Buying a property by using own fund gives you the advantage of staying debt free without the stress of EMIs. If you have put money for investment purposes then you can quickly book profit without the requirement of consent from the financial institution as in the case of loan funding. When the banks are charging an interest that is higher than the return that you are expected to earn on your own fund, then it is better to use the money to buy the property using own fund instead of a loan.

When To Buy Real Estate On Loan?

When you want to buy a property and do not have sufficient liquidity in hand, then a loan is a good option to arrange funds. Buying a property on loan gives you several benefits. You get the income tax benefits under section 24 for interest paid against the Home Loan.

Your own fund can be used to make an investment and generate a higher return. You get liquidity in hand and don’t have to run around arranging the fund for achieving the financial objectives. When the interest on a loan is lower than the return you expect to generate from own fund after adjusting the tax obligations, then it is a better option to get the loan for buying the property and invest own fund to generate high return.

Using a loan option, you can leverage on your financial capacity, and invest in multiple properties at the same time to earn an attractive rental return as well as capital gain in the long term. While buying a property on loan, banks perform strict due diligence, therefore, it reduces the chances of risk that is common in the realty market.

Let us check out various options for funding your property buying while using loan option, own fund and loan plus own fund option.

Amount to be paid if the property is bought on loan for 30 years tenure

Interest (Pa) Loan Amount Tenure EMI Amount paid in 30 years
Loan 8.50% Rs 1 Cr 30 years Rs 76891 Rs 2.77 Cr

If you buy property using own fund, then you’ll save the interest payment of Rs 1.77 Cr (Rs 2.77 Cr ‘Less’ Rs 1 Cr) which is to be paid in the next 30 years.

Option- I: Buy using own fund and invest amount equivalent to EMI in SIP scheme

Buying property using the own fund and investing the amount equivalent to EMI to pay SIP for 30 years

Investment Instrument SIP Amount/Month (In Rs) Tenure Return (Pa) Corpus after 30 years
Mutual Fund Rs 76891 30 Years 8.50% Rs 12.78 Cr

Note- Return expectation is assumed to be equal to the prevailing loan rate for illustration purpose

Option- II: Buy property on loan. Invest own fund in Mutual Fund and pay EMI using SWP option (Feasible when return on investment is greater than interest on loans)

Buying property on loan and invest own fund to earn a higher return and pay the EMI using SWP option

Return Pa (After Tax) Investment Amount Tenure SWP/Month to pay EMI Corpus in hand after 30 years
Mutual Fund 10% Rs 1 Cr 30 years Rs 76891 Rs 1.46 Cr

Note- Return is assumed at a moderate level for only for illustration purpose

Depending on your income expectations, return on investment in the prevailing market and interest on a loan, you can accordingly plan to buy a property on loan or use your own fund. In Option I, you are saving higher amount because you are using your future income to pay for the Systematic investment plan (SIP), on the other hand under Option II you are using the existing fund with systematic withdrawal plan (SWP) option to generate the required EMI for next 30 years.

Bottom-line

In a nutshell, you can use the following two points to identify whether you should go for a loan option or to buy using own funds:

Buying a property with a loan Vs. Own fund

Case I If Return on Investment (After Tax) > Interest on Loan ‘Less’ Tax Benefit: Buy on Loan
Case II If Return on Investment (After Tax) < Interest on Loan ‘Less’ Tax Benefit: Use own fund to buy a property

When you choose the suitable funding option, you must keep in mind that the interest rate and return of investment may fluctuate significantly in the long term so you need to be careful and have another plan ready to handle the situation. You must consult your financial advisor before you go ahead with the payment plan to buy a property.

Value table – borrowed dunding Vs. own fund

Key points Using borrowed Using own Fund
Interest on loan Yes No
Tax benefit on the loan Yes No
Rental return Yes Yes
Long-term capital gain tax benefit Yes Yes
Possibility to earn, invest and earn higher returns on own fund Yes No

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