Is it a good practice to use a bank fixed deposit for constructing a house instead of availing a home loan?
Jitesh Parekh, Chennai
A home loan is a liability, while your deposit in the bank is an asset. The home that you will have in your name will also be an asset once it is ready. However, you need funds to be able to construct it. If you finance the construction of your home with a loan, you will increase your assets as well as your liabilities. That is fine as long as the worth of the house remains high and the appreciation in the market value of the house is higher than the cost of the loan. However, if you are worried about the burden of a long-term liability like a loan, and are not sure whether or not property prices will continue to appreciate, you would do well to use a part of your deposits and take a smaller loan for financing the construction of the house. You also need to look at the effective cost of your loan. After the tax break on interest, the effective cost of the loan that you might take will come down. Besides, you are also entitled to some tax relief on the amount of principal that you have repaid, subject to certain limits. If you are able to get a return that is higher than the post-tax cost of the loan, it makes sense to go for it. However, you must also be sure that your loan is easily payable from your regular income.
