With a home loan covering 70-90% of the cost of a home, the remainder has to be paid by the homebuyer. Investments in liquid mutual funds can be used for the down payment. If the purchase is at least five years away, you can use PPF and equity mutual fund investments to bridge the gap.
Buying a house is usually the biggest financial transaction of our lives and therefore is viewed with a degree of trepidation. One question that many first-time homebuyers grapple with is how much money they need to spend out of their own pocket. They also wonder how much loan they need to take, and what they’re actually eligible for.
Let’s examine a few thoughts connected to saving for your first home, and what you should be aware of with respect to your loan eligibility.
What a home loan covers
Let’s say the nominal cost of a home is Rs 100. A typical home financer—be it a bank, NBFC, or housing finance corporation—may lend you anywhere between Rs 70 and Rs 90 to help finance the purchase. Not just that, you need to be eligible to receive this loan amount. This means your salary minus your fixed expenses and pending loan EMIs should be sufficient to manage the repayment of your new loan. The remaining cost—Rs 10 to Rs 30—needs to be borne by you. This is money you need to be ready with when going for a home purchase.
Going beyond home costs
While your home alone costs Rs 100, you will also bear associated costs. For example, in most states in India, the cost of registration and stamp duty would be around 6% of the home price. Then, there are smaller costs: brokerage, loan processing costs, repairs, furnishing, packing and moving. Let’s say these total additional costs come to 10%, which takes the total cost of home acquisition to `110. Let’s say your loan eligibility works out to be `80. Which brings us to the all-important question: how do you raise the remaining Rs 30?
Use safe investments for short-term
To create your down payment purse, use safe, liquid money instruments. Monthly fixed or recurring deposits are a good way to start. If you seek higher tax efficiency, try liquid mutual funds or short-term mutual funds. You would earn a moderate rate of return via these instruments, and the money can also be redeemed easily. These instruments are ideal for a tenure of three to five years.
Use equity for long-term
If your house purchase will happen only in the long term—say, five years or beyond—you can also use such options as PPF, equity mutual funds, and balanced mutual funds. Equity investment via SIP can help propel you faster towards your money target.
Compare options between banks and NBFCs
No regulated lender, be it a bank or an NBFC, can fund the costs of stamp duty and registration. But NBFCs can incorporate these extra costs into the market valuation of the property, thus allowing you to borrow larger amounts. If your home loan eligibility is falling short, or if you’re looking to borrow a larger amount for any reason, you may take your loan from an NBFC.
Don’t be in the dark about eligibility
Most people don’t hear the words “credit score” or “loan eligibility” till they actually need a loan. You don’t need to be in the dark about what your credit score is or what you borrow. Many lenders today offer the most attractive loan rates to customers with the best credit scores. You can check your credit score for free online. Just Google for “free credit score” and get your credit report in two minutes. A score of 750 or more would allow you to receive the best loan offers. Secondly, you can calculate your loan eligibility online. Simply use one of the many loan eligibility calculators available online.
The writer is CEO, BankBazaar.com