STEVEN FERNANDES, Proficient Financial Planners | Source: Moneycontrol.com
Take stock of your liquid investments and your monthly income. This will give you an idea of how much you have to arrange. Rely only on safe debt fund to save money for down payment
Life’s biggest financial decision is buying a house and therefore it requires lot of calculated planning in advance to avoid any regrets later on. Considering the escalated property prices, most houses or flats would necessarily have to be purchased with the help of a housing loan. Assuming that the preferred location is identified, the next thing to do is to decide on a budget which should include the price of the property and other charges like stamp duty, registration charges, Vat, etc. Let’s assume that Akash (34) and Avni (33) are presently staying on rent and they have planned to buy an apartment after 2 years in a desired locality costing Rs. 70 lakhs today. Considering a 10% increase in price, the estimated price of this apartment after 2 years will be Rs. 85 lakhs. The couple’s monthly income is Rs. 125000 and they have the following financial assets as of now.
Assets Value (Rs)
Savings account ==> 350000
Fixed Deposits ==> 1000000
Equity Mutual funds> 400000
Monthly Income Rs. 125000
Monthly Expenses Rs. 55000
Monthly Surplus Rs. 70000
1. Deciding the amount of loan that needs to be taken.
While most banks provide loan up to 85% of property value, you need to first check the EMI that you would be most comfortable with rather than decide based on what the bank is offering. For example, in the above case, after taking care of the monthly expenses, the couple have a surplus of Rs. 70000 per month. They can comfortably opt for upto 45% of their net monthly take home salary as EMI which comes to Rs. 56250. This will enable a loan of approximately 52 lakhs for a tenure of 15 years at 10% interest. Now the couple is clear that they need to arrange the down-payment which is Rs. 33 lakhs in 2 years’ time.
In some cases, where people don’t have any substantial investments to make the down-payment, they go for a higher loan component thinking that the higher EMI will pinch in the firsts year but with salary increase expected going ahead, servicing the high EMI will become manageable. They need to be prepared to reduce their lifestyle and rework on their expenses as the salary increase might get delayed. In case you have a good amount of investments, then you could work vice versa and add up your investments to see how much is the gap and then decide on the loan amount.
2. Planning to arrange the down –payment
It is during this time that a list of all the available financial resources is made by most couples and accordingly all the liquid resources like savings account, fixed deposits, gold, mutual funds are considered to make the down-payment. Care should be taken to ensure that you maintain funds separately for at least six months of contingency and any short term goals. Rest of the funds can be considered for the down-payment. In our given example, the savings account balance is maintained for contingency and mutual funds are also maintained separately for interiors and other post possession expenses.
In the above case, fixed deposit can fetch Rs. 12.60 lakhs @ 7% post tax interest and the balance required now is Rs. 20 lakhs for which the couple will have to invest Rs. 78500 per month in liquid funds and recurring deposits (50% each). Budgeting becomes very important during such times and reducing expenses becomes crucial.
Whenever down-payment is to be made in less than three years time frame one should invest on a monthly basis in debt instruments only like liquid funds, ultra-short term funds or recurring deposits. Do not invest in equity funds or stocks thinking that you will get better returns in 2-3 years which will reduce your loan amount. One needs to play extremely safe when dealing with short term investment, especially for a home. Gold invokes a lot of sentiments but for such an important goal, one needs be prepared to use a part of it to shore up the down payment.
3. Borrowing from family/relatives
If you are falling short of down-payment amount by a few lakhs, do not hesitate to borrow from your close family members as most would not even charge any interest on that loan. Secondly you will get some time to pay off the loan as per your convenience. I have come across several people who explored this option and took a soft loan either from their in laws, siblings or close cousins. Take this as the last option.
4. Other things to consider
Since most people utilize their entire life’s savings for buying a house, they could be running low on liquidity in case any adverse event such as medical emergency were to take place. Therefore one should be adequately covered for health and life cover or review one’s existing covers when buying a house.
Steven is a member of The Financial Planners’ Guild , India ( FPGI ). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.
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