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While opting for a home loan, lenders will not sanction a loan for the entire cost of the house. Moreover, as per the RBI’s directions, lenders are not allowed to take into account the stamp duty and registration charges, while computing the cost of the property. Consequently, a portion of the total amount, has to be financed with the buyers’ own funds and is called ‘margin money’. The percentage of margin money varies from 10% to 25%, depending on the loan amount. There are various ways in which borrowers can raise this margin money.
By liquidating past savings, or taking a loan against securities
For a majority of home buyers, this is the main source to finance the margin money. The savings may be in different forms (funds in bank accounts, fixed deposits, investments in shares and mutual funds, investments in National Savings Certificates, etc.) and depending on the requirement, the same may have to be liquidated.
At times, the market price of some of your investments in shares or mutual funds may not be good. In such cases, one can try and avail of a loan or overdraft facility against the security of such assets, instead of selling the same at a loss. Please note that all the shares/mutual funds may not qualify, for the overdraft facility. Lenders, generally, have a list of the shares or mutual fund schemes against which they lend.
Loan on your life insurance policies
If you have purchased life insurance policies, which are not pure term plans, you can get a loan against the policy, subject to certain conditions on the number of years for which the premiums have been paid, the minimum loan amount, etc. These loans are relatively cheaper.
Withdrawal from provident fund/public provident fund accounts
Although EPF and PPF are meant for retirement, one can also use these funds to buy a house. If you have completed five years of contribution to your provident fund, the rules allow the employee to partially withdraw money from the account. Likewise, if you have contributed for at least six financial years to your PPF account, you are allowed to withdraw a part of the funds, without giving any reason.
Loans from friends and relatives
One can also borrow money from friends and relatives. This may only be possible, if you enjoy good relations with them or if you have helped them in the past.
As a last resort, you can take a personal loan to fund your margin money. However, you need to be careful about the timing of the loan. If you have availed of the personal loan before the home loan, your personal loan will reflect in your credit report and this will impact your home loan eligibility, as the home loan lender will take into account the EMIs of your personal loan. Conversely, if you apply for a personal loan after the home loan, it may be difficult to get a sanction, as the home loan lender would have already taken into account your maximum loan eligibility. So, you need to time the applications such that they do not cross each other.
The rate of interest on personal loans are very high, as compared to home loans. Moreover, you need to make a realistic assessment of your future cash flow, to ensure that you can service both loans. A default in the payment of EMIs, will spoil your credit score and your future ability to borrow.
(The author is a tax and investment expert, with 35 years’ experience)