Normally when you approach a bank or a home finance company for a mortgage loan, they will insist on some margin from your side. That is meant to reduce the financer’s risk and ensure that your own money is also committed to the asset. The margin required may range from 10% to 20% and depends on the age of the customer, the income level and the price of the property. Remember, the home loan value is calculated on the overall cost of the apartment including the cost of the house, cost of interiors, registration and stamp duty. Most banks will fund up to 85% of this value. Some banks travel that extra mile to finance you for your furniture and woodwork within the house. Either ways, the principle should be to reduce the loan to the extent possible by bringing in as much money as you can afford as margin. After all, your home is a lifetime asset and you have to put your best foot forward.
Normally, for a small apartment costing ₹75 lakhs in a metropolitan city in India, your personal margin will be close to ₹10 lakhs. Obviously, nobody carries this kind of liquidity and hence you need home loan down payment assistance.
Here are some ways you can do it with the pros and cons of each one of them:
Making the market returns work for your home loan down payment.
This is a very smart and intelligent way of planning for your home loan down payment. When you are planning to purchase 5 years down the line with a margin of ₹10 lakhs, then you can start a SIP with around ₹12,000 per month. Instead of taking the risk of an equity fund, you can opt for a balanced fund, which will give you an average return of around 13% per annum. By saving just ₹12,000 per month in this SIP, you invest a total of ₹7.20 lakhs of your money while the balance ₹2.80 lakhs comes in the form of market returns. Of course, you can also get a higher return by opting for an equity fund but then 5 years is not exactly a time frame during which equities will necessarily generate returns as per your expectations. Hence a balanced fund will hedge your risks better. The moral of the story is that when you plan your home purchase well in advance, you can make the power of compounding work in your favor.
Swipe out your profits from your equities to meet your home loan down payment.
This is an option you do have provided you are sitting in the midst of a bull market and are sitting on healthy profits from your equity holdings or your equity mutual funds. The question is whether you should be taking money out of your investments. Remember, buying a home is one of your major lifetime goals and you can always make that exception. Again, we are not suggesting touching the principal amount invested. You can just swipe the profits out and use to pay the margin money.
You can also fall back upon your Provident Fund balance.
Not many are aware of this but premature withdrawal from your provident fund is permitted for special purposes and purchasing a home is one of them. The entire process of withdrawal takes about 21 days. While the PF department promises to release the funds in 1-week time, it is always safer to provide for delays since this request will have to be forwarded through your employer. When you plan to use your PF money to pay for the home loan margin, provide for the extra time of 21 days. Also, remember that if your PF has been continuing for more than 5 years only then you can withdraw the money without any tax implications. Else, the withdrawal is treated as an income in your hand and you will have to pay a steep tax on that.
Negotiate with your banker for a bridge loan.
Normally, the bridge loan to finance your home loan margin is given provided you are willing to give some hypothecation against the loan. If you have another property ownership or shares or bonds or even endowment policies with assured surrender value then you can hypothecate these assets with your bank and actually get a much lower rate for the margin loan. Normally, secured loans attract a relatively lower rate of interest compared to unsecured loans. However, in principle you will still be adding to your overall debt and you need to be cautious about that.
Take a personal loan to pay the margin money.
Personal loan is an unsecured loan your bank will provide that is based on your credit history. A basic caveat needs to be understood here. Personal loans being unsecured are high cost loans. The average cost of the loan can range from 16-18% and is best avoided unless it is absolutely inevitable. Many home buyers use the personal loan as an interim financing measure till the time other sources of money can be brought in. Here you need to remember that personal loans carry a 6 months lock-in and there is an exit load of up to 5% on these loans for premature closure. All these can substantially add to your costs.
So, in reality there are a variety of ways to finance your home loan margin. But as prudent investors we suggest to use the SIP route to plan your margin well in advance. That way your money also works hard for you.
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