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Planning for Home Loan down-payment? Let this MF strategy help you

Applying for a home loan isn’t difficult, thanks to online applications. But did you know that as per RBI rules, you need to cough up 20% of the total loan amount as a down payment?

Applying for a home loan isn’t difficult, thanks to online applications. But did you know that as per RBI rules, you need to cough up 20% of the total loan amount as a down payment? With some banks it’s 10 % as down payment, but that’s a big amount too. Say if you plan to buy a 1.5 Crore home, 20% as down payment would be Rs 30,00,000.  If the down payment is 10%, it’s Rs 15,00,000. 

Coming up with such an amount isn’t as easy as applying for the loan. But, there are by and large three ways people usually pay for the down payment. However, not all these options would really work for you. Read on to know more about the best option. 

Using personal savings

One-way people cough up the down payment option is by tapping into their personal savings. They liquidate the majority of their investments in FDs, RDs, Bank accounts, Mutual Funds and the like. Some even withdraw some money from their EPF account.  

While there’s nothing seemingly wrong with liquidating these investments, the main issue is, either you won’t have any financial investments left or you might end up emptying a large amount of your investment kitty meant for other goals. 

Remember, once your home loan EMIs start, you will may have a lesser investable amount to put towards your major financial goals.  

You will have to service the extra EMI to repay this debt. And, with two EMIs (down-payment loan and home loan) you may find it difficult to manage funding other financial goals.  The personal loan will also impact your credit score. 

Taking a loan 

Another way is by taking either a personal loan and/or loan against some asset like gold. Remember, you will be paying interest, which can be 18 % for a personal loan, and 12 % for a gold loan. 

You will have to service the extra EMI to repay this debt. And, with two EMIs (down-payment loan and home loan) you may find it difficult to manage funding other financial goals.  The personal loan will also impact your credit score. 

The smart option 

If this house is the house you are going to live in, the amount invested isn’t going to give you any returns, as you are living in it. This means you need to keep your home loan EMIs affordable. 

It makes sense to pay a large down payment amount, rather than increasing the loan amount, and consequently a higher EMI. It’s best to postpone the purchase of the house by a few years and gather a larger amount for the down-payment. 

Take the SIP route 

It’s better to save first and buy the asset later, than buying an asset first and saving later. Say you decide to start saving towards your down payment early and postpone buying the home by say six years. For four years invest via SIP in a debt Mutual Fund.  This allows accumulating the required sum of money for the goal over the time available. 

An ultra-short term fund is good for the duration in question. They also provide the requisite stability necessary for such financial goals. This also means you may have to invest a greater amount per month as you should account for a rate of return of about 7%-8%. This is lesser than what an equity mutual fund will give but the volatility makes it an inappropriate instrument considering the time frame you would normally be dealing with. You would have gathered your down payment amount little by little over a few years and this strategy wont derail you from your other financial goals. 

Little by little, you can gather a large amount and own your dream home without facing cash flow issues.

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