Not all expenses of buying a home are covered in the home loan. You need to save the out-of-pocket expenses before you decide to venture into this expensive yet beautiful project. A responsible ownership plan can help you raise the money and move in the right direction.
By Sangeeta Sinha
BUYING a home is an exciting milestone but poses many challenges, the most crucial being saving enough for the down payment. If you decide on a house then five to seven per cent for stamp duty and registration charges plus some miscellaneous charges will be needed.
All these extras may add up to around
INR 1.5 million. It will be a big amount to pay from your pocket. How to raise this fund?
Check your affordability and make a responsible plan for this expensive purchase. Follow the simple rule; if you can’t afford don’t buy. Set a realistic amount based on your financial situation and other responsibilities, like saving for retirement or a child’s education.
Getting a big loan may not be difficult but stick to your original plan. The excitement of a big house may not last long when your EMI takes away most of your income. How much you can afford could depend on several factors like your income, expenses, going interest rate for mortgages, down payment etc.
SAVING FOR DOWN PAYMENT
Once you have reached a realistic price range, the next move would be to plan the down payment target. Down payment is the amount of money you pay out of your pocket, right at the start, towards the purchase of the house. For most buyers the first challenge is to save enough for a down payment.
Typically, banks insist on a minimum margin of 15 per cent; therefore, you should save enough to meet this requirement, says a senior official from a leading bank. For example, if you think the home may cost INR 5 million then you must have `750,000 as down payment.
Now what if you don’t have enough for down payment? Are there loan schemes for 10, five or zero per cent down payments? Such options are usually not available with banks, says a loan expert from banking services. Some Non Banking Finance Companies may offer this but the rate of interest will be much higher. Since we are looking at a 20 to 30 year repayment even a two per cent difference in interest will be substantial, he adds.
It is not prudent to go for lower down payment option on account of the higher cost of borrowing, advises the expert. People buying a house with the aim of selling it for a profit may find this attractive as the appreciation may be greater than the cost of borrowing.
HOW TO SAVE
So it is a good idea to plan well and save at least for the down payment. Your saving techniques should depend on how much time you have. If it is two to three years, perhaps a recurring deposit where you put in a fixed amount is suitable. If the house is to be bought five to 10 years later then a mutual fund SIP may be better as the returns may be higher.
Banks also offer personal loans with a repayment of three to four years. This can be a good option for meeting any shortfall in margin money/down payment, advices the official. Since property prices are going up all the time instead of waiting to accumulate enough for down payment one can take a personal loan.
However, opting for personal loans can be an expensive affair, as interest rates are very high. It is always a good idea to pay the down payment from your own money, savings or by liquidating some assets.
When it comes to your mortgage different loan types and payment options that are available can baffle you. You can go for five, 15, 20 or 25-year options. Some banks even offer 30-year options As there is a limited rebate on interest paid on home loans, typically the 20-year option appears to be the best one according to an expert.
You can choose your option based on your repayment capacity. Lower tenure will mean lesser interest payment but a high EMI. Tax rebate will also be available for a lesser period.
BE FINANCIALLY PREPARED
Owning a house involves lot of other costs and not just the monthly mortgage payment. You should have enough funds for taxes, insurance, maintenance and even emergency repair fund. Don’t forget the stamp duty and registration fees.
Be sure of your job security and your ability to get a new job quickly in the event of a layoff; in case of any doubt don’t get into such a big liability.
Nowadays builders also offer many options to make your financing easy. Check with your builder if he has any scheme for stage payment. There is also a trend where the builder asks you to pay 20 per cent initially and 80 per cent after possession. In some cases even the EMI (interest part) is taken care of till you take possession. There is also a trend where builders have tie-up with banks where they have schemes like paying some amount at the booking time and rest after completion. Some also offer a holiday scheme where EMI starts after a year after you take possession. So do your home-work well, research and then plunge.
1. Aim for a home you can really afford
2. Ideally you should save and invest towards the goal when it is three to four years away
3. If you have not done that you could look into your fixed deposits or other short term investments
4. You could even borrow against these instruments, if it is difficult to liquidate them
5. Tap into your long-term investments as the last resort
6. Avoid personal loans and credit cards; they carry exorbitant interest rate
7. Explore the option of borrowing against mutual funds, fixed deposits, insurance policies or even jewellery
8. Partial withdrawal can also be considered from your provident fund