Buying a house comes with a lot of decisions. Some need to be made instantly, some can be more mapped out. Some need to be more logical and some need to be governed by the heart. Some we can help you with and some only you can decide on.
One such decision that we can help you with, is whether you should buy your next home with an upfront payment, aka cash, or opt for a home loan or mortgage, aka financing.
To start, let’s get the first most important bit of information out. There is no way to legally buy a house with an all-cash payment in India. In this article, whenever we talk about a cash purchase, we are referring to a payment on a home, made through various banking channels without borrowing.
If you’re someone who’s saved up enough to be able to pay the full amount of your home upfront, i.e. at the time of purchase, you need to evaluate certain factors. Fortunately, we’ll dive deep into all of them here.
How To Buy A House In Cash?
Before we get into which of the two ways, cash purchase vs. financing, is better while buying a house, let’s understand the process that one needs to follow to make a cash purchase in the Indian real estate market.
Step 1: Sign A Sale agreement
Once you have your heart set on a property, the first and foremost step is to negotiate a price and set the terms and conditions for the sale. This is a step that many buyers often forego due to the lack of awareness. Sometimes, buyers might also deem this step unnecessary. However, it protects you in case there are issues with the property that you still haven’t found out about.
In this sale agreement, you can lay down the token amount, the buffer time, and the total time of the transaction. You can easily find a sale agreement either online or through the seller or the buyer’s lawyer or realtor.
Step 2: Document Verification And Title Certificate
Since you’re not being safeguarded by the bank, which will perform all these checks on the property before sanctioning the loan, you’ll have to get documents verified. Once you have signed the sale agreement with the seller, you can ask for copies of the property tax, encumbrance certificate, mother deed, and all other official documents related to the property. Once you get them verified and are satisfied with the results, you can obtain a Title Certificate.
A Title Certificate declares that the property is free from all encumbrances and possible disputes and legal claims.
Step 3: Protect Your Interests With An Indemnity Bond
An Indemnity Bond suggests that the property, once sold, cannot be claimed by any of the seller’s legal heirs. It also adds that the seller has not taken out any mortgages on the property. The Indemnity Bond is a legally recognized agreement between the seller and buyer stating that in case any encumbrances occur in the future, due to the seller, the seller will be required to compensate the buyer for the same.
Step 4: Execute Sale Deed And Make The Final Payment
This is the last step for the cash purchase of a property.
Once the indemnity bond is signed, the buyer can move forward and execute the sale deed. You can make the full payment for your property. The safest mode of payment is a banker’s cheque or a demand draft.
How To Buy A House With Financing?
Similar to the cash purchase method of buying property, let’s look at the process of buying a home with the financing option before diving into ts comparison with a cash purchase.
Step 1: Applying For A Home Loan
When buying a property through financing, you’ll first have to apply for a home loan. In India, a minimum of 20% down payment is required when buying a home. Thus, you can apply for a loan of up to 80% of the purchase price of the home you wish to buy.
Once you submit your application, the bank will initiate a thorough evaluation of your financial history and credit behaviour. This includes going through your credit report. This will help them determine how much loan you are capable of repaying and how much your interest rate should be.
Step 2: Getting Approved for a Home Loan
Once the bank has decided that you’re a good candidate to offer credit to, they’ll give you a loan offer letter. This offer letter will contain all the terms and conditions in relation to the loan.
- Duration of the loan.
- Mode of repayment.
- Rate of interest.
- The loan amount offered.
- Any other offers and schemes in the loan.
Step 3: Property Verification By The Bank
Similar to getting the property documents verified by a lawyer, as you would in case you were making a cash purchase, the bank will verify the property documents too.
This step saves you the hassle as a bank would have more means and a lower margin of error while making these property verifications.
Step 4: Disbursal of Home Loan By The Bank
Once everything is verified, the bank will then disburse the loan according to the terms and conditions in the offer letter, in lump sum or instalments.
Cash Purchase Vs. Financing: Overview
This table will give you a clear overview of how the two methods of purchasing a house, cash purchase vs. financing, will affect your financial profile.
Although you will still have to pay fees like property tax, maintenance fees or homeowner’s association costs, the total will still be less than if you had to pay a hefty home loan EMI.
A home loan EMI is a huge charge on your monthly income and can easily be about 50% of your disposable income.
Final Cost of Property
The final cost of the property will be just a little bit higher than the purchase price. This is simply due to the closing costs associated with a property purchase in India.
The final cost of the property will be higher than the purchase price you initially agreed to pay due to the added interest on your loan. While it may not seem significant initially, interest can be almost as much as the principal loan amount on loans with a longer tenure.
Cash offers can be used to negotiate and obtain discounts.
No discounts are available while paying with a home loan.
Average closing time is 21 days.
The closing time on average is 60 days.
Closing costs are comparatively lower.
Higher closing costs due to costs related to taking a loan.
Return on Investment
The money once invested in a property and thus cannot be re-invested in any other form of asset.
Since no money s stuck in the property, it can be invested n various assets to yield a better ROI.
No taxation benefits.
Home loans are tax-deductible.
Your liquidity status changes as a house isn’t a liquid asset unless you get it re-financed.
You are highly liquid as you didn’t have to pay a lump sum from your savings.
Affect on Credit Score
Not having any loans can affect your credit history and decrease your credit score in the long run.
The timely repayment of a mortgage will improve your credit score.
The social conditioning in India with relation to owning assets has long been of buying them with an upfront payment. However, that is now changing with more people getting familiar with credit systems and understanding the tax benefits that it allows for.
While it is still your decision to make after considering all the points provided above, taking out some sort of a loan on your property is a good idea in regards to the liquidation of assets and the comparative investment value of the sum you’re investing in the property. Whether you chose to make a cash purchase of your next home or choose one of the many financing options available, make sure you understand the risks and utilize the benefits that come with your choice.