A few decades back, a dream home was built brick-by-brick. Today, a house is built EMI-by-EMI. But what has remained unchanged across every generation is buying the right house at the right time at the right place. Before a bank or a housing finance company steps in to fulfil this dream, you would need to get your contribution (down-payment) in place, to start off the process.
A down-payment is an initial upfront payment for the purchase of expensive items/services such as a house or a vehicle. It is usually paid in cash or equivalent at the time of finalising the transaction. After this, the loan in the form of equated monthly instalments (EMIs) comes into the picture to fund the rest of the purchase. In a metro city like Mumbai or Delhi, for an apartment or a house priced Rs 50 lakh to Rs 1 crore, the down-payment amount is in the range of Rs 10 lakh to Rs 20 lakh.
At a time when everyone is used to ‘buy now pay later’ schemes, when you need to pay first, at least a part of the money, you need to plan for this in advance.
Saving For Down-Payment
The first step to saving up for a down-payment is to calculate the amount you would need. Typically, consider targeting a 20 per cent down-payment based on your goals. This is the amount you need in savings. It’s wise to add in an additional Rs 1-2 lakh for unexpected costs. Once you have a budget and a timeline, you can start investing. Your investment instrument depends on how much time you have to put your corpus together. If your investment window is small, say, 1-2 years, then opt for instruments such as recurring deposits that have minimum risk. However, if you have a longer window of, say, 5 years or so, you can consider investing in mutual funds, which provide higher returns.
“However, as markets can be volatile, it would be best to move your money from market-related instruments to more secure instruments at least a year before you reach your goal so that your accumulated savings are not impacted by any volatility in the market,” says Adhil Shetty, CEO, BankBazaar.com
Parking Your Investments
You could park your money in high-quality debt mutual funds with maturities of around 3 to 6 months. You can also use a high-yielding savings account, where you can earn a much higher interest on deposits above a certain threshold. “Apart from that, there are always FDs (fixed deposits) and RDs (recurring deposits). Do not invest in equity unless you have a long investment window of 5 years or more,” says Shetty.
Saving Up More For Down-Payment
Calculate the size of the corpus you need. This will tell you what is the goal you need to work towards. “Chalk up a budget and stick to it. Include all your scheduled expenses and investments and see where you can improvise and save further. Establish a separate account for every financial goal and save specifically towards it. This will give you a clearer picture of where your finances stand and how you can make them better,” adds Shetty.
Saving up for a big enough down-payment frees you from having to take a heavy home loan, even if the interest rates are low, as is the case now, and home loans are considered good loans as you get an asset in return. However, at the same time, a smaller loan means less liability, smaller EMIs, and more money in your hands to invest in instruments that give higher returns.