When people buy a home with their hard-earned money, they often make one big mistake: investing the entire amount in cash. This may be an emotional decision, but from a financial perspective, it’s a direct loss. True and prudent investors know that taking out a home loan isn’t always a bad thing.
With the right strategy and deep financial understanding, this very loan can provide you with a unique opportunity to build wealth worth crores in the future. This article explains how, by thinking like a smart investor, you can grow your money faster instead of tying it up.
The Miracle of Capital Distribution
Imagine you have enough capital of ₹50 lakh to buy your dream home. A wise investor applies a golden rule here: instead of investing the entire amount in the house, use only a portion as a down payment. Suppose you pay only ₹10 lakh and take out a home loan for the remaining ₹40 lakh.
Here’s where the magic begins: The investor invests the remaining ₹40 lakh in high-return investment vehicles, such as mutual funds. If this investment continues to grow at an average annual rate of 12% for the next 20 years, this ₹40 lakh can grow to an astonishing ₹3.85 crore. This unique strategy gives you the extraordinary power to simultaneously own a home and build wealth worth crores of rupees.
The Interest Benefit
The common perception is that the 9% interest on a home loan is a burden, but savvy financial planners see it as a benefit. Home loans typically pay 9% interest on average, while well-researched mutual funds can yield returns of 12% or more over the long term. This means you’re earning a net additional 3% return on your investment.
This 3% difference, combined with the power of compounding, becomes not just a short-term gain but the key to long-term financial success. In this way, you effectively borrow money at a low rate (9% loan interest) and put it to work at a higher rate (12% investment return), which would be impossible if you invested the entire capital in cash.
Tax Savings
One of the biggest and most tangible benefits of taking out a home loan is the substantial tax savings, which directly increase your net income. In India, both the principal and interest paid on a home loan are tax-deductible. Under Section 80(C), you can claim an annual tax deduction of up to ₹1.5 lakh on the principal payment, and under Section 24(b), you can claim a tax deduction of up to ₹2 lakh on the interest payment.
This means that you are exempting up to ₹3.5 lakh of income from tax each year. This great feature significantly reduces the effective cost of your loan and allows you to purchase a home while simultaneously increasing your savings.
Risk Management and Market Intelligence
Buying a home in cash completely ties up all your capital in a single, less liquid asset. In contrast, a loan strategy allows you to mitigate risk by dividing your assets into two distinct categories—physical assets (home) and financial assets (investment portfolio). You should also assess the market before making financial decisions.