As a young millennial, one of the most important financial goals on your mind could be purchasing a home you can call your own. And why not; after all, it could give you a prized possession, a secure future, and an elevated social and financial status, all at once!
Besides, you can conveniently do away with the tedious task of paying a hefty rent month after month. Since you are considering buying a home, I believe you already know about Home Loans, and how they aid this big-ticket purchase. However, did you know – most Home Loans cover only 80% of the cost of your residential property? The onus of arranging the remaining 20% of the price lies on your shoulders. This amount is known as the down payment.
Down payment is basically the upfront payment that you make to the seller or owner of the property. The Reserve Bank of India has set the minimum down payment cap at 10% of the property value, for the home purchase. Having paid this amount, the lender can be assured that the home buyer has enough equity in the property and will efficiently repay the Home Loan.
Now let’s find out why it is significant to pay a down payment. First, have a quick look at the salient features of Home Loan down payment.
The minimum down payment that you ought to make is equivalent to 10%-20% of the market value of the property, thus implying that the Home Loan amount that you can procure from the lender is 80%-90% of the price of the property. Hence, if you are planning to purchase a home worth Rs. 50 lakh, you can apply for a Home Loan of Rs. 40- 45 lakh. While, the remaining balance needs to be paid on your own, out of your pocket.
While the minimum down payment limit is set at 10% of the market value of the property, there is no upper limit. You can pay as much amount towards this as you can afford. Since making a larger down payment will effectively lower the amount that you need to borrow from the Home Loan provider, it can help ensure lower EMIs as well as considerably reduce your overall interest outgo. Hence, you must try to make as big a down payment as feasible for you.
In case you wish to purchase a residential house which is relatively old, say 15 years or more, the lender may not be as confident about the property and may not offer a Home Loan exceeding 50% of the market value of the same. In such a situation, you will be liable to arrange for the remaining 50% of the amount as the down payment.
While down payment constitutes 10% or more of the value of the property, it does not comprise of additional costs such as that of Registration, Property Taxes, Stamp Duty, Legal Fee, etc. Hence, you must be prepared for these additional expenses, over and above the down payment.
More often than not, arranging for a down payment may take anywhere between 5 to 10 years, subject to your income, your living expenses and the property that you are willing to purchase. To this end, it is highly advisable to take certain measures that can help you arrange this seemingly large amount in the most efficient manner. These include –
When you are at the beginning of your career, your family size is smaller, and your responsibilities are lower. Hence, it is recommended to plan your purchase at this point and work towards building a fund that can be later used to make the down payment.
When you start earning, it may be tempting to create a comfortable lifestyle without caring to save any money. However, if you plan to purchase a residential property, you must budget your expenses such that you are able to save at least 15% or more of your monthly income.
Over the years, you will save a substantial amount, and you can put your plans into action according to your needs. Besides, you can conveniently procure a reputable credit of your choice such as HDFC Home Loan when you decide to make the home purchase.
As for down payment, the more you pay, the better it is for you in the long term. Hence, you should not shy away from asking friends, family members or even your employer for a soft loan. Since such a credit accrues no or very little interest, it will help you save a substantial amount of money. Of course, you should only consider this alternative if you are sure of being able to repay the amount in full, within a reasonable period of time.
In case you do not have enough savings or are unable to procure funds from friends or family, you can opt for a Personal Loan to make the down payment. However, you must remember that a Personal Loan often proves to be a costly credit accruing to high interest rates ranging from 11 to 22% per annum.
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