A few decades ago, one built a house brick-by-brick. Nowadays, one needs to build a house EMI-by-EMI. What hasn’t changed across generations is the first step to set aside money for the down payment.
The down payment on a house means the upfront payment made to purchase or sign-up for it. Homebuyers pay the down payment in cash or equivalent to finalise the transaction. The balance is paid by a home loan in the form of equated monthly instalments (EMI).
Most lenders offer 90% of the property value as a home loan. Consequently, the minimum down payment for a home loan that one needs to pay is 10% of the property’s value. While many hope to get a zero down payment home loan, the facility is not an option from banks as per RBI’s guidelines. Zero down payment financing is an option for purchasing expensive appliances but not homes.
So, one must plan finances wisely to reduce the severity of the down payment in case there is a shortage of funds.
How much is the down payment for a home loan?
Before beginning to save for the down payment on a house, one must calculate the required amount. Many lenders specify a minimum down payment for a home loan, but it is one’s choice whether to pay the minimum or make a larger down payment as per affordability. A higher down payment tends to work better for the homeowner as one has higher home equity before moving into it.
A bit of planning and lifestyle changes can make it easier for one to fund the down payment:
Follow the 50-30-20 rule.
Setting aside money necessitates discipline and serious efforts to make investments that generate maximum returns. To develop financial discipline, one must follow the 50-30-20 rule, where 50% of the salary is used for fixed expenses, 30% for other discretionary expenses, and 20% for savings. While cutting down on luxuries and other costs is challenging, one needs to do it to buy a luxury dream home.
Make significant lifestyle changes.
If the goal is to buy a home, one must consider changing their lifestyle. Plan out a monthly budget and identify all areas where money can be saved. Cutting down expenditures on entertainment, vacations, and subscriptions is one of the most effective ways. Another way to save money is by temporarily relocating to a smaller apartment, which could help save a significant portion of the monthly rent. It is also wise to think of additional sources of income apart from the regular job.
Build a corpus.
Building a financial fund is one of the simplest ways to accumulate funds for the down payment on a house. By saving early in life, ideally from the start of one’s career, one can enjoy the benefits of compounding to snowball savings into a meaningful corpus. Initially, consider allocating money to high-return investments like equity funds. After that, book gains and transfer the funds to safer investments like a bank fixed deposit.
Monetising other assets.
To plan the purchase of a home, one must have saved for it for a minimum of three or four years. But if one hasn’t done it yet, one can monetise other investments to arrange for the down payment. Consider liquidating a fixed deposit or borrowing money against a life insurance policy.
Depending on the insurance company’s terms, one can borrow up to 85% or 90% of the surrender value. The interest rate for such a loan range between 9% and 10%, and there is an option to repay the full amount at maturity or pay half-yearly instalments.
Take help from family and friends.
If there is still a need for more finances despite taking the above measures, one could borrow the balance from family members or close friends. The option has a significant advantage since one may not need to pay any interest on the borrowed amount. Besides, if there is any delay in payments, there is no worry about late penalty fees. However, it is advisable to return the borrowed amount immediately.
A home loan is vital to buy the dream home suited for one’s lifestyle and family. And a down payment is crucial for a home loan. Depending on one’s financial situation and preferences, the size and mode of accruing a home loan are determined. While purchasing a house with the minimum home loan down payment is possible, a higher down payment offers many advantages.
Use the above tips to save for the down payment on a house. Alternatively, look at Piramal Realty’s offer of a fixed home loan interest rate of 6.85% until 2024 on their luxury residential projects.
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