Buying one’s own home at an early age is no longer an unattainable dream, thanks to the home loan options available. Bank financing for buying a home is very easily available today provided the documents are in place but one has to repay the loan in the form of EMIs. And even before the bank has agreed to finance the purchase, the home buyer has to come up with his share of the money, which is the down payment. In a metro city in India, the average price of a decent home is about Rs 50 lakhs to Rs 1 crore and the down payment can be anywhere between Rs 10 lakhs to Rs 20 lakhs and arranging that kind of money in a short span of time can be difficult, especially if one already has some other loan like an auto loan or a personal loan for which they are already paying their EMIs.
Buyers like these often opt for Systematic Investment Plans in mutual funds. The money that is accumulated is often used to pay the down payment for the house. Banks mostly charge about 80% of the home loan price whereas the non- banking financial institutions cover 85% to 90% of the charge, although the interests are a bit higher. If one has a goal in mind and plans early, arranging for a down payment will be easy.
What should you do?
The idea is to get the numbers right and if the plan is to buy the home in the next two or three years, one should make room for inflation. So, a unit that costs Rs 50 lakhs now, will probably cost around Rs 55 lakhs in the next two or three years and likewise, the amount of the down payment will also go up. Next, one also has to keep the stamp duty and registration charges in mind and then also calculates the GST that would have to be paid for it. It is important to remember that the lesser one borrows, the easier it would be to repay the home loan later. It is a far better idea to work hard and save harder in the beginning and pay as much as a down payment as possible, than acquiring a huge home loan and miss out on the EMIs later, which would result in the bank foreclosing the property if you fall back on the payment. Such a risk is simply not worth it so it is important to pay special attention to the down payment from the very beginning.
Hence, it is important to increase one’s income through investments and alternate employment to arrange for the down payment and just in case there is another priority, it is better to postpone home purchase till one is in a financially secure position. One could consider saving in equity mutual funds or even aggressive hybrid funds to accumulate the money if one has more than five years in hand. For those with shorter tenures, one could still increase the money somewhat with the help of fixed deposits and recurring deposits. That is because markets are volatile in the short term and investing in mutual funds could result in the investor finding himself with even less money than he started out with. The incentive here should be accumulating money rather than wealth creation and the closer one is to make the down payment, one should move to money accumulated to less risky ventures.
Other tips worth following
One could also consider investing in bonds and they have a good return at about 6% steady return rate. A mix of equity and debt mutual fund is also a good idea provided one has a good knowledge of market upheavals and pitfalls. Some home buyers think of getting a personal loan to pay the down payment but that is not a very good idea because not only do personal loan themselves come with a higher rate of interest, you will also have to pay off the personal loan as well as the EMIs of the home loan that you will have to subsequently apply for to pay for the rest of the price of the apartment.
Having two loans simultaneously to repay, that too, one with a higher rate of interest, is not a good idea if you do not have a high income and doing that would just put your property at risk and you would again risk foreclosure if you fall behind on your payments for too long. One should also ensure that there is a high credit score, to begin with so that one can claim the minimum possible interest on the home loan.
With careful planning, it is quite possible to accumulate the money for a down payment over a period of three to five years, especially in a double income household and owning one’s dream home would be attained with ease with some careful and long term planning.