5 Disadvantages of Home Loan is quite unusual topic for my blog. I personally feel that any financial decision should not be biased and prejudice. We should look at both the aspects before arriving at final decision. Based on rough estimates, 80% residential real estate transactions in India are executed by availing Home Loan. For majority of Indians real estate affordability is major concern. At the same time there is no love lost for Real Estate & Gold. Home Loan is blessing in disguise for this section. Buying a property on Home Loan is a major financial decision and each financial decision comes with own set of advantages and disadvantages.
Based on my experience, i would like to add that this post “5 Disadvantages of Home Loan” is 1st post in India highlighting financial disadvantages of Home loan. I could not find any other post on this subject. Many readers might not agree with certain points but i believe in sharing honest and frank opinion. Let’s check 5 critical disadvantages of Home Loan
Actual Cost of Property
One of my friend purchased a 3 BHK apartment in year 2007 for 50 Lac. In 2012, he sold the same flat for 70 lac. Sounds good & prime facie he made profit of 20 lac on his investment. This is not the case as he paid approx 24 Lac interest on Home Loan of 40 Lacs in 5 years. Now, next question coming to your mind will be that he saved income tax also. We will address this in next point but in real sense the actual cost of property is 74 Lacs i.e. 50 lac (Cost) + 24 Lac interest. Not withstanding this, his principal liability at the time of sale was approx 20 Lacs. Reason for very high interest rate payout initially is that principal component paid during initial loan years is minuscule compared to interest in total EMI. Higher interest component offset the property appreciation to large extent.
Loss of HRA Component
One of the major disadvantages of Home Loan is loss of HRA component, if property is self occupied. It is mainly applicable for people with high salary. In lieu of HRA, you can claim maximum deduction of 1.5 lacs on Interest component. Doing reverse calculation, it comes out to be monthly deduction/income tax saving of Rs 12500 in interest component. Assuming, you are staying in Non-Metro city & getting 40% of Basic Salary as HRA. If your basic salary per month is less than or equal Rs 31250 than you will either gaining or at no profit no loss by availing home loan in terms of Income Tax Saving. In case your basic salary is more than Rs 31250 than you will be definitely at loss as your HRA benefit would have been higher compared to gain from deduction on Home Loan Interest paid. Besides deduction on interest, not too many people get benefited from deduction under section 80 C on principal repayment as 80 C limit of 1 Lac is too less to accommodate EPF, insurance, school fees, Principal Repayment of Home Loan etc.
Home Loan is Long Term Commitment
Though average duration of home loan is 8 years but it is just an average. Median is normally 10-12 years. If you have any major financial goal lined up in next 10 years like kids education or marriage than Home loan is a major hurdle to fulfill the same. Home Loan put major burden on finances atleast for initial 4-5 years and then it takes another 3-5 years to recover from same. You must be wondering, salary will also increase but we need to account inflation also which is devaluing the salary hike. Last year suppose i got hike of 7% in salary but with average inflation of 10%, in real terms my salary reduced by 3%. This point remain remain one of key disadvantages of home loan until unless there is sharp jump in income levels.
Volatile Interest Rate Movement
Daily i get 4-5 cases where people are serving EMI from last 2 years but principal outstanding is still same as it was at the time of availing loan. Reason, when interest rate increases banks increase the loan tenure rather increasing EMI thus your interest component increases in EMI. In few cases, principal outstanding is more than original amount even after 2 years. Uncertainty in Interest rate movement is one of key disadvantages of Home Loan. You may opt for Fixed Rate Home Loan but it also not fixed in true sense. You may read my post Floating vs Fixed Interest Rate Home Loan
The biggest flaw in our calculations & one of critical disadvantages of home loan is that we don’t consider opportunity lost. If i am paying 2 Lac as principal component during a year then my opportunity lost is returns which i would have received, if i would have invested same money in some other financial instrument say Bank FD. Assuming 9% interest rate, my opportunity lost for the year is Rs 18000 & it should be reduced from home loan benefits.
I tried to list major disadvantages of home loan from financial perspective and each of these points should not be considered in isolation. You should list down all the benefits along with financial disadvantages of home loan to arrive at final decision. The biggest savings is on monthly rental if property is self occupied but does it offset the loss of HRA component, i cannot answer as it depends on multiple factors. It is important to take 360 degree approach. If you feel, i missed any important point i.e. key disadvantages of home loan then feel free to post in comments section.
Copyright © 2011-2013 Nitin Bhatia. All Rights Reserved.