Planning the downpayment

Coughing up that 20 per cent of the total amount as downpayment for buying a house of your dream is always a challenging task. Banks as per the Reserve Bank of India (RBI) are required to fund at least 10 to 20 per cent of the entire loan amount as the downpayment when taking a home loan. That means this is the amount you would be paying upfront to the property owner when buying a house. In that case one should be able to plan their house purchase a few years in advance so that one is able to save a decent amount before setting out for the big purchase.

Sometimes, it may make financial sense to just live in a rented premise because your money otherwise is working hard for you and you give your money time to grow thereby letting compounding work its magic. But, we have an emotional attachment to our "own home" which is where all the financial common sense or practicality goes out of the window. The security you get on purchasing your own house will be short lived if you don’t take other factors into account which impact your downpayment hugely. Here are some of the guidelines Outlook Money recommends:

Consider the impact of EMIs

If you don’t take into consideration the impact of EMIs on your monthly cash flow, the peace of owning a house of your own may just be short lived. Burden of EMIs can lead to sleepless nights than you cannot anticipate while buying the house. Says Shweta Jain, Chief Operating Officer, International Money Matters: “By and large most people use up most of their savings while paying for the downpayment of their homes. This usually includes all investments that they can liquidate- Mutual funds, FDs, RDs, Bank accounts etc. While there is nothing wrong with liquidating these investments, the problem arises when you don’t have any financial investments left and the EMI payment does not let you save anything.”

The biggest issue in all this is that the house becomes your single biggest asset-investment which does not generate any returns because you are living in it. That said, the downpayment for the house and the EMI that you will pay should both be affordable. “Postpone the purchase of a house for a few years if you don’t have any savings handy rather than increasing your loan amount and consequently, your EMI” explains Jain.

Don’t ignore other costs

One should not forget that there are registration and related costs, such as stamp duties, brokerage charge if house is bought through a house broker etc., which are not included in the downpayment. These costs are over and above the downpayment amount that the homebuyer has to bear. Says Jain: “One thing which most of us forget are the other costs that come with buying a house- be it stamp duties or property taxes or even costs of furnishing the house which run into lakhs (if not more) too. When buying a home, if it is under construction, do account for delays because there will be times where you will be paying both rent and EMIs.”

Start early

It’s never too early to start saving for a house. Your savings would depend upon factors such as your current salary, amount one can save every month, and the property price. Suppose if one is required to save Rs.10 lakh, by saving Rs. 5000 every month, one will be able to do so in 11 years one month, by considering minimum 7 per cent interest earned on savings. Says Tarun Birani, Founder and CEO, TBNG Capital Advisors, “It is always better to save and then buy an asset, rather to buy the asset and then save later. Just like any other goal planning, down-payment should be incorporated in goal-planning early in time. But, if you buy without planning, your long-term saving which could have compounded in future; you would be risking that today”

One can cultivate the habit of early saving through investing in SIP mutual funds through equity linked saving schemes. Rakesh Makkar, Executive Vice President and Head – Business, Marketing and CSR, Fullerton India credit company says, “While purchasing a house, one can always avail a personal loan for paying the down payment. However, it is advisable to have a long term savings plan (of around 6-8 years). One can start saving by putting smaller amounts of money (around Rs 3000) into equity linked-mutual funds for the next five years. Given the positive sentiment in the economy, one could look to favourable returns in this regard.”

himali@outlookindia.com