Raising the first 20% of your future home requires as much planning and discipline as buying the property itself.
Are you familiar with VS Naipaul’s classic A House for Mr Biswas? If not, here’s the gist in one sentence: the novel is a litany of misfortunes that hounds the protagonist, an Indo-Trinidadian male, throughout his life till he dies following a cardiac arrest, but content in the knowledge that he has built a house, howsoever faultily designed, that will provide his children and later generations with shelter.
At the end of the day, that is all we look for – shelter – along with food for subsistence. From the Neanderthal in his cave to the Hollywood diva behind her high walls to the real-life Mr Biswases, humankind has first sought food to eat and then a roof above. Everything else is frills.
So if you are looking for a house to buy, it is but a natural desire. But owning a house these days is easier said than done, given that property prices have reached the moon …literally. An average, new, two-bedroom flat in a big Indian city can easily reach Rs 70 lakh; banks are cagey about offering loans for property older than 15 years.
Talking of a housing loan, the maximum you can borrow is capped at 80% of the property value, by law. The remaining 20% is what you have to raise in your own; this is called a down payment. Some lenders ask the borrower to come up with 15% as a down payment before they sanction the loan.
For a property with a price tag of Rs 70 lakh, the maximum sanctioned loan will be Rs 56 lakh, which means you pay Rs 14 lakh (20% of property value) as a down payment. Add another Rs 2 lakh as miscellaneous expenses (property taxes and registration costs etc); this means you have to raise Rs 16 lakh.
If you have not inherited the amount, you have to work for it, right? The question is: How do you go about it?
Back-of-the-envelope calculations show a home buyer would need about eight years to raise this amount if his or her annual salary is around Rs 8 lakh, or about Rs 67,000 a month. The calculations assume that a fourth of the income will be saved and that the usual increments will be somewhat negated by rising living costs down the years.
Please note the calculations also assume the income is post-tax, which is not the case in reality – TDS cannot be wished away. Please also note that chances are that you may not get this kind of salary to start with.
Alongside, please remember that saving a quarter of one’s salary is very difficult and needs the discipline to practise economy and foregoing unnecessary expenses.
But most importantly, are you willing to grind it out for eight years for your dream apartment? Prices are bound to escalate, raising the required down payment amount as well. Plus, your liabilities will increase with age.
So unless you start planning early and keep a horizon of three-five years, your down payment amount will be tough to achieve.
- Soft Loans: Soft loans are those that attract little or no interest. Loans from family come under this head. Some employers also offer soft loans at low-interest rates; the paperwork required here is usually pretty simple.
- Personal Loans: Soft loans may not work out always, or even if they are available, amounts available may not be enough to cover the down payment required. If so, you can opt for a higher personal loan, but do not expect any tax benefit just because it is for purchase of a home. However, you also need to be careful about the loan amount as a higher ongoing loan may impact your home loan eligibility.
- EPF Loans: You can consider taking a loan from your Employees Provident Fund (EPF) account, provided you have one for more than five years.
- Tapping NBFCs: Some private finance companies offer what is called the Home Loan Down Payment loans or simply, the HDP loan; most commercial banks do not offer this facility. These loans are usually secured against gold.
- Pledging securities: To make a down payment, you can raise funds by pledging financial assets like shares, securities, insurance policies etc. Loans are offered by most banks against demat shares, RBI Relief Bonds, mutual fund units, insurance policies, UTI bonds, NSC and KVP. Loans against securities provide you instant liquidity without having to sell your securities.
- SIP Route: Next to family/employers’ help, the best bet is the equity mutual fund route, provided you are not baulked by the word “investments”. If you are disciplined enough to start a SIP at Rs 15,000 per month at 0% annual step-up, you would have invested Rs 9 lakh at end of five years, but gained Rs 6.6 lakh. Your estimated returns: Rs 15.6 lakh.
Making a Budget
But whatever you do – take a loan or invest regularly – it will only be possible if you make a personal budget and be disciplined about adhering to it. This is how you can go about it.
- Set Goals
When making a budget, it is advisable to set a goal, and you have set yours: owning your home. But at the same time, also remember that financial goals matter a lot; they encourage you to save more. Your immediate financial goal: Rs 16 lakh.
- Expenditure Plan
To save, you need to track your expenses, hence the expenditure plan. This will cover food expense, utility bills, rent/home loan, tax, commuting expenses, weekends/holiday expense, etc. See where else you spend.
- Make a Budget
Next is the monthly budget covering two expense categories: fixed and variable. The first headlines fixed expenses of a month (food, home rent/ loan, other loans, utility bills etc). The second covers expenses that vary each month: entertainment, holidays, eating out etc. The second can be pruned.
- Lose Debt
Paying off loans should be a big part of your monthly budget. This means using credit cards only during emergencies.
Remember, while taking loans for the down payment may be inevitable, it may impact your home loan eligibility amount. Figure out to be better at your job so that your pay scale improves; owning your house/apartment is worth all the trouble. Look at these 5 reasons to go for home loan refinance.