Start planning for down payment for your house

Until a few decades ago, houses were purchased or built by putting together all the resources. But nowadays, properties are bought on EMIs. In metro cities like Mumbai and Delhi, a decent flat or house will cost between Rs 50 lakh to Rs 1 crore. Banks usually finance up to 80% of the property value. So, in case the property value is Rs 50 lakh, then Rs 40 lakh can be proivded by the bank. That means the buyer will have to arrange the remaining 20%. This is a sort of money which a person may not have readily available. So, one can plan to buy a house after five years and start accumulating the down payment. But the property prices may also increase in the meantime, So how does one go about organisning this money. Read on.

A house which costs Rs 50 lakh today will cost about Rs 65-67 lakh after five years, assuming a capital appreciation of 5-6% on annual basis.

Eighty per cent of Rs 65 lakh would be Rs 52 lakh, which the bank would provide as loan. So, a down payment of Rs 13 has to be arranged by the buyer. Also, on adding stamp duty, registration charges, lawyer fees, and other expenses, it will cost around Rs 5-6 lakh more. Which means after 5 years, a buyer must have Rs 18-19 lakh for the down payment and other expenses.

Salary of borrower
Planning for making down payment depends on the salary of the borrower.  As per standard rules of  personal finance management, 20% of the salary should go into savings, which could be used for down payment. For example, if a buyer’s salary is Rs 1 lakh per month, he should save Rs 20,000 every month. If he invests this amount in mutual funds through SIP, he will be able to accumulate total of Rs 16,49,727  after five years. This is assuming an annual rate of return of 12% in mutual funds. Returns are market-based and subject to fluctuations.

Even then he would fall short  of 2-3 lakh rupees. The question is how will this be arranged? The solution lies in Sushil’s annual increment. The buyr’s monthly income will not remain static at Rs 1 lakh for five years. There will be some increment every year which can be invested in mutual funds. He can increase investment in mutual funds by 10 or 20 percent of his annual increment.  He will be able to pay the remaining amount by increasing his investment in mutual funds because of pay hikes.

MF can create welath
While planning for the down payment, you should always keep in mind your salary. And also after how long  you want to buy your dream  house.  Stay invested in equity mutual funds for at least five year.  First, create an emergency fund so that you can withdraw money during emergencies. Only the down payment will not suffice… Home loan comes with burden of monthly EMI. Before buying a house, you should make sure that your budget is not disrupted by the EMI.