After considering the required down payment as per the property value, your existing income and debt repayment capacity, choose the right investment avenue to make your home purchase possible
From spotting the right location to funding, buying a house is a big financial decision; especially raising the initial funds to make the purchase requires smart decision making. As per the RBI guidelines, the down payment (an upfront payment you make to purchase a home) should be 20 per cent of the purchase value of the property, making it a key component of your financial budget. And depending on the price of the home, this amount can vary. Hence, arranging the down payment is a long-term project and it needs a good deal of discipline and planning.
“Those planning to purchase or construct housing property through home loan after a few years should first estimate the future price of their targeted housing property after factoring in the housing inflation. Then, find the applicable loan-to-value ratio for estimating the size of the financial corpus required. As expenditure heads like stamp duty, registration charges and other statutory costs incurred during the purchase of housing property can be of a sizeable amount, it should also be included in the targeted down payment corpus by buyers,” says Ratan Chaudhary, head of home loans, Paisabazaar.
He further adds, “As equities can be volatile in the short-term, borrowers planning to accumulate down payment corpus within five years should invest in short-term debt funds through SIPs or in high yield fixed deposits. Short-term debt funds usually generate higher post-tax returns than fixed deposits for those having investment horizons exceeding three years. Those having more than five years to build the down payment corpus can invest in equity funds as equities as an asset class usually outperform fixed income instruments by a wide margin over the long-term.”
Are you planning to buy a home next year?
Picture this…if you are looking to purchase a house worth Rs 40 lakh, 80 per cent of the purchase can be funded by the financial institution, which is Rs 32 lakh worth of the loan. The remaining 20 per cent (Rs 8 lakh) needs to be borne by the buyer as down payment. According to Atul Monga, co-founder and CEO, BASIC Home Loan, since one year is a short-term period to arrange the down payment, the buyer can explore the following options:
- EPFO has allowed members i.e. the contributory employees of the provident fund (PF) scheme to use 90 per cent of EPF accumulations to make down payment to buy the house. However, the employee must have served a minimum of five years with the organisation;
- If an employee has been working with the same company for many years, it helps in building trust and loyalty and the employer usually offers general purpose loans to their employees at a low rate of interest;
- The buyer can also consider investing in liquid instruments such as commercial paper, fixed deposits (FDs), etc with a one-year maturity period as they will give them decent returns, thereby helping them reach the magic figure.
Are you planning to buy a house within the next three to five years?
The home loan interest rates are starting from as low as 7.75 per cent at the present moment. However, before a housing finance company or bank steps in to help you, you have to arrange for the down payment. Hence, Amit Goenka, CEO, Nisus Finance explains how you can go about it:
- If the value of your property is Rs 75 lakh, then your down-payment (20 per cent of the purchase value of the property) would be approx. Rs 15 lakh. Hence, you can adopt a safe and low risk investment plan wherein you can invest in SIPs, bonds or recurring deposit for up to three years;
- Once you decide to accumulate the money for the down payment, you should focus on the target amount, time on hand and your risk profile. If you have more than five years on hand, you should consider investing in equity mutual funds or aggressive hybrid funds. In the case of equity (with a five-year time-frame), stay with multi-cap or large-cap equity funds. The motive is to accumulate money and not create wealth, so as you move closer to your desired amount or the deadline, shift your money to relatively less risky fixed-income options if you are investing in equity funds. For a five-year time-frame, assuming a 12 per cent rate of return on equity funds, you have to invest Rs 24,659 per month. For a double income family, this is very much achievable with some deft planning;
- Remember, the bigger the down payment, the smaller is your EMI and the lesser is the stress on your monthly budget. You also need to assess how much loan you are eligible for. Lenders typically keep the EMI at 30-40 per cent of the net take-home pay of the individual. You should also obtain a credit report from the credit bureaus. The RBI has mandated that a person should get at least one base-level credit report free in a year.
Dos and don’ts while arranging the down payment
- “Try to contribute a higher down payment instead of accumulating just the minimum requirement of 10-25 per cent. This is because the higher you contribute from your pocket, the lesser you would need to borrow and repay in the form of principal as well as applicable interest on the home loan;
- Consider investing in high yield fixed deposits or debt funds if you need to accumulate down payment within three years; hybrid funds for an investment horizon of three-five years; and equity mutual funds for an investment horizon of above five years;
- Maintain a good credit history, plan and control your daily expenses and review your investments periodically as it will help you meet your target within the time-frame;
- Home-buyers often commit the mistake of disturbing their earmarked investments set aside for retirement and a child’s higher education. They fail to realise that doing so would have not one but two consequences. First in the form of failure to achieve the set goals, and being exposed to the possibility of booking losses while redeeming market-linked investments during bearish market conditions,” adds Goenka.