How to plan for house purchase down payment of a home
Home-loan may seem such an easy option for house hunters, thanks to glossy ads in newspapers and hoardings! But, are you aware of the fact that as per RBI guidelines that the loan-to-value (LTV) ratio of housing loans is not supposed to exceed 80%[for loan amount more than 30 lakhs] and 90% [for loan amount less than 30 lakhs], banks could extend only a percent of the amount to the home-loan seekers, forcing you to arrange for down payment.
So how do you approach to arrange for down payment? The best advice is to start planning early, however if you failed to do so, you would need to explore other avenues, described in our current article.
What is Down payment? And Why Down Payment Exists?
‘Down payment,’ in simple terms is the difference between the buy price of a property and the mortgage loan amount. One of the prime reasons for its existence is
- It emphasizes the buyer’s commitment to complete and close the deal and also signifies that the buyers would be loyal in making the loan payments.
- It’s like insurance to the lenders, as in case the buyer defaults they could lose the property and the down payment money.
- It also ensures that banks or the lenders are protected from fall in interest rates since the amount that they lend is lower than the market value of the house.
How to raise a deposit for first time home buyers?
Stacking up deposits for the first time home buyers is like a hurdle to cross. Here are quick ways to achieve it.
Know How much Amount Is Needed
As per RBI directive only 80 % to 90 % of the loan amount gets sanctioned, and apart from that some of the other charges and expenses would be –
- Stamp Duty
- Registration Charges
- Brokerage Fee [ If applicable]
- Sundry Expenses
- Miscellaneous/Out-Of-Pocket Expense
So for example, if you have planned to buy a house worth 50 lakhs, here is the rough estimate of down payment.
Property Value = 5,00,00,00 INR
Loan Amount Sanctioned = 80 % of property value
= 4,00,00,00 INR
Amount to be Provided by you as part of down payment = 5,00,00,00 INR – 4,00,00,00 INR
= 1,00,00,00 INR
Stamp Duty ~ 5 % of Property Value
= 25,0000 INR
Registration Charges ~ 1 % of Property Value
= 5,00,00 INR
So, roughly the amount needed for down payment would be – 1,00,00,00 INR+25,0000 INR+5,00,00 INR
= 1,300,000 INR
In some cases banks offer funding of the above mandatory costs like stamp duty as part of loan sanctioned. It is good to check on the same with your bank.
Note – The stamp duty and registration charges vary from one state to another. Hence, make sure to check with the local authority regarding the same.
How to Raise Deposits?
Now, that we are bit clear on how much amount is needed, let’s look out the ways to raise cash for the same.
Start Early Savings
The day you dreamt of buying a home, from that moment one should start saving/investing for home. It does not matter how small the amount is, what matter is starting and planning.
Get Smart with SIP
A smart financial planning could give you good returns when needed through SIP or systematic investment planning. Planning for the down payment amount by calculating the future value and making a systematic monthly investment over the period required
Exiting From Stocks
Profit booking on your investment portfolio- stocks and mutual funds.
Life Insurance Policy Could be a Savior
If you own a life insurance policy, you could plan to take a loan against it. The maximum loan amount that is available under the policy is 85 % in case of paid-up policies, including the cash value of bonus for endowment policies.
Going For Home Improvement Loans
You may apply for home improvement loans to meet your down payment needs. But Banks and NBFC’s both look for eligibility of the candidate and home improvement loan cannot be taken for under construction property.
Opting For Personal Loans
The personal loan should be the last option to cater to your down payment needs. As with interest rates almost 14-20 % and tenure quite limited to five-eight years, it means a stressful position for your personal financial portfolio.
Facts You Should Know About Down Payments
- The amount of down payment usually ranges from 15-20 % of the property value
-
There is no limit to down payment, if you have a surplus, you can pay more than 15-20 % of property value as down payment. The more you pay, the less you have to avail loan, resulting in lesser EMI and less stress on your monthly income and less interest outgo
-
The age of the property directly affects the amount you need to pay in down payment. As older the property, more cautious banks get to sanction the loan amount.
- There is nothing like ‘zero-down-payment’, do not go with a glossy ad stating zero-down payment, as the reality is bit different. Please do read the fine print.
So start saving early and make sure to invest some ‘x’ term each month for your dream home. As with each penny saved, you are one step closer to your dream home. We hope we have answered your queries on how you could save for your down payment. If you still have any unanswered questions or need help, feel free to contact us here.
We would be glad to help you with your planning and investment related decisions.
Samiksha Seth
Content Strategist – Dilzer Consultants Pvt Ltd.
Sources
http://www.rediff.com/money/2009/mar/18perfin-home-buying-all-about-down-payment.htm