How to arrange down-payment for your house purchase?

We look at some of the options one can consider.

Demand for housing in India is currently at its peak, private estimates show, because of wide variety of factors. Fueling this demand is also the comparatively lower rate of home loan interest—banks in India are currently charging annual interest in the range of 8.5% and above.

However, unlike in the West, where banks lend almost the entire value of properties as housing loan, a buyer in India must arrange at least 20% of the property’s value from his own funds under the RBI-approved loan-to-value ratio guidelines.  This money is commonly known as down-payment for property.

But, what if you are falling short of arranging this 20% amount from your own savings and still don’t want to let go of the opportunity to grab your dream home at the earliest? What would be some safe ways to arrange this down-payment for some safe sources without taking a monetary hit?

Dig into your savings in FDs, RDs 

At the start of their careers, most people find it convenient to use their savings to generate a regular and hassle-free income by way of investing in simple mediums of money making. Thes include investing in fixed deposits and recurring deposits. These are the first places to look when you plan to arrange the down-payment for your home. If you and your spouse are making the purchase together, both of you could join forces, and a substantial amount can be gathered to make the initial purchase.

 

 

Get your borrowed capital back

We like to help your friends and family members in their time of need and so do they. Try and remember and make a list of relatives or close friends who borrowed money from you in the past and have so far not been able to return it. Explain to them the actual reason for the sudden demand and request them to return it as soon as possible. You are going to need every penny you can arrange without having to pay an interest. This could be a highly crucial source of money.

 

Borrow from family members

We must first approach our near and dear ones in out time of need. This is your best bet because of the sheer safety and cost advantage involved. Check if your parents or spouse can help you with the down payment even if you are taking this money as a debt and plan to return it in due course. Not only would you save a great deal of time, energy and paperwork but also secure a lender, who will be more compassionate and sensitive if you are unable to repay the loan within a specified timeline, owing to some unforeseen event. If you plan to pay an interest to this family member, you will also be able to enjoy tax deductions on this payment.

See also: Should you take loans from family members to buy a house?

Word of caution

You run the risk of damaging your personal relationship in case you fail to repay the money as planned. Treat the entire arrangement as a professional one and meet your obligation accordingly.

 

Withdraw money from your provident fund (PF) account

The Employee Provident Fund Organization (EPFO) allows subscribers to withdraw a certain portion of their provident fund (PF) money for home purchase and various related purposes. A subscriber could avail of a loan that is equal to 36 times his wages, for property purchases. Read our guide on how to check your PF balance using UAN member login.

PF withdrawal reason Withdrawal limit
For buying a plot 24 months’ basic salary and DA
For constructing a house 36 months’ basic salary and DA
For buying a ready-to-move-in house 36 months’ basic salary and DA
For home improvement/renovation 12 months’ basic salary and DA
For repayment of housing loan 36 months’ basic salary and DA.

See also: PF balance check with UAN number  & process to check Member Passbook

Word of caution

However, withdrawing from your PF account might take some time and requires paperwork. You would also have to keep your employer informed about your purchase decision, as they will have to verify your application and send it to the local EFP office. Also note that in case you are leaving your employment, you will be able to withdraw the whole amount lying in your PF account, subject to certain conditions.

See also: How to use your provident fund to finance a home purchase

Take a loan against insurance policy

A policy holder can get between 80% and 90% of the surrender value (the value you get when you terminate the insurance plan voluntarily), of the insurance policy as loan. Let us understand this with an example. If you have an insurance cover of Rs 50 lakh and its surrender value is Rs 20 lakh at the time of requesting for the loan, you may get Rs 18-19 lakh as loan.

Word of caution

The interest rate on loan against insurance policies is higher than home loan rates and ranges from 10%-12%. Also note that a loan can be taken only against traditional life insurance policies and not against term plans. The policy holder needs to pay the interest on the loan, along with the regular premiums. In case of default on any of these counts, the policy will lapse.

 

Take a personal loan

This should be your last option and must be used, only when you cannot find any other alternative. This is because personal loans are unsecured and hence, cost more than any other type of loan. You may end up paying nearly 11%-20% interest on personal loans.

Word of caution

“Personal loans are only recommended when the buyer has no other option. Personal loans can elevate the financial burden on buyers, with its higher interest rates and their shorter terms for repaying monthly installments. Lower interest personal loans are only possible, if one has a good credit score and stable income. So, try and maintain a good credit score from the very beginning, if a personal loan is your only option,” says a senior executive at a leading Mumbai-based Fintech, requesting anonymity.

 

FAQs

How much money can I get as a home loan?

Banks generally provide up to 80% of the total value of a property as loan.

How much down payment should I make for a house?

You can pay more than the minimum down payment, if your savings permit you to do so.

 

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