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Self-Financed Homes: A Guide to the Potential Risks Involved

Having a home of their own is a significant milestone in one's life. However, with the rapidly increasing prices of real estates, it can be complicated to buy a new home or construct their dream home. If you are among the many individuals weighing the options between self-financed homes and home loans, here is a helpful guide that makes it easier to understand the better choice.

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Self-Financing or Home Loan - Which One is Better?

At the time of choosing between the option of self-funding for your home and taking a home loan, the following table will guide you in differentiating between self-financing or home loan:

Basis of Differentiation Self-Financed Home Home Loan
Fund availability When building your home, firstly, you will use all your savings to purchase a home, and then you may miss potential investment opportunity funds. A home loan can leverage your purchasing power, allowing you to buy your dream property that you cannot afford with cash alone.
Tax Benefits No tax benefits are provided when you choose self-financing for your home. Purchasing a home loan can give you tax-saving benefits, especially in the case of interest and principal amount repayment.
Liquidity Tying up your savings to build a home can limit your liquidity, making it harder to access cash in emergencies. Having a home loan provides you with a chance to diversify into other required financial areas.
Benefits of Home Loan Insurance In the unfortunate event of a death or disability, your family members or dependents might have to face difficulties in arranging funds or outstanding expenses that may needed to construct the house. Home loan insurance protects the outstanding loan amount in case of the borrower's death or disability. Hence, it ensures the loan is paid off in case of any emergency without hampering the construction process.
Credit Score There is no credit score checking or paperwork to fill out. Purchase and timely repayment of home loans aid in improving credit scores.

What are Self-Financed Homes?

A self-financed home is created solely with the savings of the future homeowner. Due to the one-time payment of their venture, there is no chance of fund diversification or tax benefits. Although the idea of self-financed homes seems reasonable, multiple risks might hamper all your savings.

Risk of Self-Financed Homes

Some of the most common risks that potential homeowners may face when self-financing for a home are as follows:

  1. Arranging funds

    The first risk you may encounter is arranging funds for the project. With increasing property rates, it might be challenging to accumulate adequate money to begin building a home. Such a step can be disastrous in a sudden emergency within your family.

  2. No tax rebates

    Self-financing means you won't take any loan. You will miss the eligible tax rebate under Section 80C on mortgage interest payments.

  3. Missing out on government schemes

    Another risk directly related to your home's self-financing is you might miss government schemes, which are quite useful & affordable. One of the common the scheme is Pradhan Mantri Awas Yojana. It aims to offer affordable housing loans and launches several schemes. Here, you can avail of the home loan at the interest rate starting at 6.50% p.a. for a tenure of up to 20 years.

  4. Preservation of cash - emergency, investment and other reasons

    Deciding to self-finance your home's construction might seem a good idea. However, it might be risky since no finances are readily available if an emergency strikes. With the help of a home loan, you can keep your savings intact and retain liquidity for other significant investments or unpredictable risks.

  5. Credit scores will not be built

    Finally, a credit score is the most significant risk when self-financing your home. Since you will be paying the builder for the construction of your home directly, there will be no chance of a credit score being created or built. The absence of a credit score may cause some issues in the future when you decide to take a loan for other purposes.

    You may also read 10 Tips to Remember When Buying a Flat

What Not to Miss? Buy Home Insurance Online

Whether you self-finance your home purchase or take out a loan, a home insurance policy is crucial. Buy home insurance online and protect your prized investment against risks such as damages or losses due to natural disasters, fire, theft, etc.

At Policybazaar.com, you can compare home insurance plans online offered by multiple home insurance companies based on your budget & preferences. Moreover, you can enhance your policy coverage by purchasing add-ons like valuable content cover, PA cover, etc.

Conclusion

A home is a place of comfort, safety and luxury. When going into the real estate market with a plan to buy a house, you must consider the pros and cons of self-financing and home loans. In the case of self-financing, there is a need to stick to the pre-decided budget, which leads to a compromise. On the other hand, taking home loan insurance will provide broader options and allow you to build a credit score for future loans. In all of this, buy home insurance online to protect your investment and provide financial security in case of unforeseen events.

Written By: PolicyBazaar - Updated: 21 February 2024
Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.
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Reviews & Ratings

4.4 / 5 (Based on 120 Reviews)
(Showing Newest 10 reviews)
Virendra
Bokaro, July 26, 2022
Coverage for natural calamity
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Bilaspur, July 26, 2022
Premium Calculation
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Ajmer, July 26, 2022
Qiuck claim
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Prashant
Delhi, July 26, 2022
Natural calamities covered
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Kolkata, July 26, 2022
Wide coverage
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Ahmedabad, July 26, 2022
Suitable insurance plan
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Yashashvi
Amritsar, June 09, 2022
Natural calamities covered
I bought a home insurance policy recently. As i live near a river and in the rainy season, my area gets flooded so in order to protect my house and its contents, i purchased the insurance to get coverage for such natual calamities and i am tension-free now.
  • Disclaimers+

    #Savings of 28% are based on the comparison between the highest and lowest premiums for a pucca building with sum insured of >₹ 1 crore at Delhi, for property age less than 5 years and policy term of 11 years.

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