How to Use Home Loans for Property Investment

The real estate sector has always been a lucrative sector for investments. It offers the potential for long-term wealth creation and financial security. However, property investments require significant capital, which may not always be readily available. This is where different home loans options come into the picture.

In this article, we will guide you through various aspects of using home loans for property investment in India. From understanding investment financing options to exploring real estate growth opportunities, we will provide you with practical advice and insights.

Real Estate Growth at a New Zenith

India is seeing whopping real estate growth led by economic indicators and favourable demographics. In 2023, home sales in major markets increased by 33% year-on-year, with a total of 410,791 units sold. This marks the highest sales volume since 2013, reflecting strong consumer sentiment and demand. 

As of now, the Indian real estate market is valued at approximately $0.33 trillion, with expectations to reach $1 trillion by 2030 and potentially $5.17 trillion by 2047.

Rapid urbanisation continues to drive real estate growth, particularly for housing and commercial spaces. The growing middle class and increasing disposable incomes are fueling this trend, particularly in Tier 2 and Tier 3 cities where affordable housing is becoming more prevalent. 

How to Utilise Home Loans For Property Investment?

Here’s how you can effectively utilise different kind of home loans for property investment:

1. Loan Against Property

For property financing, you can consider applying for a loan against property, provided you already own a property. A loan against property is a secured loan where you mortgage your residential or commercial property to obtain financing. The property serves as collateral, allowing lenders to offer larger loan amounts at relatively lower interest rates compared to unsecured loans. The repayment tenure for loans against property can vary significantly, often ranging from 1 year up to 15 years, allowing borrowers to choose a plan that suits their financial situation. 

2. Home Equity Loan

A home equity loan can also be a good proposition to finance a property investment. This is a secured loan where the borrower uses their property as collateral. The loan amount is typically determined by the difference between the property's current market value and the outstanding mortgage balance. Home equity loans generally offer lower interest rates compared to unsecured loans, making them an attractive option for borrowers.

Home equity loans can be classified into two main types:

1. Fixed-Rate Home Equity Loans: These provide a lump sum amount that must be repaid with fixed monthly payments over a specified term, usually ranging from 5 to 15 years.
2. Home Equity Line of Credit (HELOC): This functions like a credit card, allowing borrowers to withdraw funds as needed up to a certain limit. Borrowers can repay and borrow again during the draw period.

3. Traditional Home Loans for Property Investment

Traditional home loans are a common financing option for purchasing properties, including investment properties. These loans are typically secured by the property itself and come with specific terms and conditions. Traditional home loans can cover a significant portion of the property's value, often ranging from 60% to 90% of the purchase price, depending on the lender's policies and the borrower's financial profile.

Tax Benefits: Another Advantage When Taking Home Loans For Property Investment

Home loans in India come with several tax benefits that can significantly reduce the overall financial burden for borrowers. Here’s a detailed overview of the tax deductions available under different sections of the Income Tax Act on home loans, which make it lucrative for property investments. 

Key Tax Benefits of Home Loans

1. Section 80C: Principal Repayment

• Maximum Deduction: Up to ₹1.5 lakh can be claimed on the principal repayment of the home loan.
• Eligibility: This deduction is applicable for the repayment made during the financial year and includes registration and stamp duty charges.
• Conditions: The property must not be sold within five years of possession; if sold, the previously claimed deduction will be added back to income in the year of sale

2. Section 24(b): Interest Payment

• Maximum Deduction: Borrowers can claim a deduction of up to ₹2 lakh on interest paid for a self-occupied property.
• For Let-Out Properties: There is no cap on the interest claim, allowing borrowers to deduct the entire interest amount paid.
• Construction Timeline: The property must be constructed within five years; otherwise, the maximum deduction is limited to ₹30,000.

3. Section 80EE: First-Time Home Buyers

• Maximum Deduction: First-time homebuyers can claim an additional deduction of up to ₹50,000 on interest payments.
• Eligibility Criteria: The home loan amount should not exceed ₹35 lakh, and the property value must be below ₹50 lakh.

4. Section 80 EEA: First-time Home Buyers

• Maximum Deduction: You can claim a deduction of ₹1.5 lakh for interest payment against home loan.
• Eligibility Criteria: The loan should have been sanctioned between 1st April 2019 and 31st March 2022. The stamp duty of the property shouldn’t exceed ₹45 lakh. You can’t claim deduction under Section 80EEA if you have already claimed tax benefits under Section 80EE.