Buying a house is one of the biggest financial decisions that people make in their lives. As the property prices are escalating, it is almost impossible for an average middle class Indian to buy a house without a Loan. Many banks and NBFCs as well as private lenders offer home loan schemes at competitive rates. But whichever scheme you go for, you will never get 100% funding for your house. You will need to pay a certain sum of money from your own pocket upfront. This is referred to as down payment. A down payment provides some amount of cushioning to the lender, by ensuring that the borrower will be committed to repay the amount when his own capital is involved.
In India, RBI has directed the banks to grant only 80% of the property value as loan. The rest 20% needs to be arranged by the borrower. For an average middle class person in India, even this amount can be quite substantial. Let’s look at some key things that you must remember while you arrange for a down payment.
Check your CIBIL score- It is important to have a high score of more than 750, if you wish to get favourable terms on your home loan. A low CIBIL score may result in rejection of home loan application or a high rate of interest, or a higher down payment. So if your score isn’t quite good, plan ahead to pay a higher amount upfront.
Down payment limit- There is no upper limit on the amount of money that you wish to make as down payment. If you can arrange for a higher amount, the loan amount will be less. As the interest pay out will be less, it will substantially reduce the total cost of owning the house. Hence it is wise to use your savings to make a higher down payment for the house. A higher down payment also offers greater assurance to the lender. Because of this some lenders might be willing to lower the rate of interest if you pay a higher initial amount. For example IDBI home loan interest rate depends upon the amount of loan. Lower the loan amount, lower is the interest rate.
Property age affects the down payment amount-Banks are sceptical about offering loans for houses that are more than 15 years old. They do not offer more than 50% of the market price of old houses. So if you are planning to buy an old house, be ready to make a higher amount of down payment.
Let’s look at some ways that will help you arrange for the down payment.
Start Planning Early- It takes a few years to accumulate funds for the down payment. So start planning as soon as you start your career. Make a conscious effort to avoid unnecessary expenditure. Make a budget and stick to it. Do not give into impulse purchases. Make sure you set aside a portion of your income each month to build a corpus for the down payment. In the initial years, you can invest your savings in high return investments. Later on you can book your profits and shift to safer investment options like bank FDs. Make sure that you can easily liquidate your savings when it is time to make the down payment. If your funds are locked in illiquid assets, it will be a challenge to arrange for funds when you need them.
Loan from employer- Many companies offer general purpose, very low interest loans to their employees. Some employers offer loans from the provident fund account that the employee has with the co. So if your own savings are falling short then you can avail for a loan from your employer to pay for the down payment.
Loan against assets- You can also raise funds by pledging your assets like shares, mutual fund units, bonds, insurance policies etc. Some companies like Muthoot Finance offer loans for down payment against the security of gold.
Be sure of your financial position to pay for the EMI of the home loan, as well as the loan that you take for the down payment.
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