For a middle-class individual, buying a house is not just creating an asset but more than that; it gives us a sense of security. Though everyone can’t buy a house with their income, availing of a home loan becomes necessary, and with record low home loan interest rates, it is now possible. However, the maximum you can borrow from a financial institution is capped at 80% of the property value by law. The remaining 20% is what you have to raise on your own, and that is called a down payment. There are some lenders which ask the borrower to come up with a 15% as a down payment before they can sanction the loan.
For example, you are thinking of buying a property of Rs. 70 Lakh, the maximum the bank will sanction the loan to you will be Rs. 56 lakh at a home loan interest rates prevailing at that time, which means have to pay Rs. 14 lakh as a down payment. As per the experts, add another Rs. 2 lakh as miscellaneous expenses, and the total expenses come down to Rs. 16 lakh. So, if you have not inherited the amount, you have to work for it, right? The real question how will you go ahead with it? Should you take a personal loan but go by the high personal loan interest rates, is it a wise option to go for? Well, in this article, you will get the perspective on how to plan the down payment on your first house.
A loan from family members: Before proceeding with the rest of the options, do check with your parents, relatives, or spouse whether they can help you with the down payment, and you will plan to return it in due course. This option will help you save a lot of time, energy, and paperwork that other below-mentioned options entail, and in return, you will get a secure lender who will be more compassionate in times when you are unable to repay the loan within a specified timeline due to unforeseen event. However, this option comes with a word of caution. Treat the entire arrangement like a professional one and meet your obligation accordingly, or you run the risk of damaging your relationship if you fail to repay the money as planned.
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Monday 31March 2025
Withdrawing money from your PF (provident fund) account: Do you know EPFO allows you (subscribers) to withdraw a certain portion of their provident fund for home purchases and other related purposes? If you have a PF account, you can avail of a loan that is equal to 36 times your wages for property purchase. However, withdrawing from your PF account might take some time and requires exhaustive paperwork. This option involves telling your current employer about your purchase, as they will have to verify your application and send it to the local EFP office.
Taking a loan against your insurance policy: Do you know a policyholder can get a loan between 80-90% of the surrender value. For those who don’t know, surrender value is the value you get when you terminate the insurance plan voluntarily. To give you a gist, here is an example if you have an insurance cover of Rs. 50 lakh, and when you requested a loan, its surrender value was Rs. 20 lakh. In the end, you will get a loan of Rs. 18-19 lakh as loan. However, before taking a loan against an insurance policy, you should know that the interest rate, in this case, is higher than home loan rates and goes up from 10-12%. And you cannot take a loan against a term plan; the loan amount is issued against traditional life insurance policies. The policyholder will be required to pay the interest on the loan, along with the regular premiums, and if the borrower defaults on any of these, the policy will lapse.
Personal loan for a down payment: As per the experts, a personal loan to fund a down payment should be your last resort, only when you can’t find any other alternative. It is because personal loans are unsecured and personal loan interest rates are higher and hence, cost more than any other type of loan( nearly 11-20%) available in the market. However, one isn’t discouraged from using a personal loan for a down payment. If your credit history is good and has a stable income, you could be able to receive a personal loan at a personal loan interest rate with a lower interest rate.
Pledging securities: Instead of taking personal loan interest rates, you can raise funds by pledging financial assets like shares, securities, insurance policies, etc. Most banks offer loans against Demat shares, mutual fund units, insurance policies, and loans against securities. This option provides you instant liquidity without having to sell your securities. Another option you could try is the liquidation of assets and investments. To raise funds, you can sell your old bike, or a piece of land, liquidate your FD, MF, etc.
Why taking a personal loan for making a down payment is not a good idea as you may think so
When one isn’t left with any other option, there is a tendency to go for personal loans to arrange down payment. But, not every other financial planner support this idea. Almost every one of them will advise the new borrowers to relook at the investment they would have made in the past without considering their financial goals. Or you could have inherited some amount from your family. Personal loan interest rates charge you a high rate of interest (more than 14% p.a.), and do you know they eat into your borrowing capacity when you go for a home loan? And in case you are not able to repay your loan, it could set you back with a bad credit score.
Though one should completely avoid taking personal loans, not all of us have the time on our hands. You may have a good credit history, and if you are getting a good deal on a personal loan, then you may go for it, provided no other option is left to fund your down payment.
As mentioned above, to buy a home using housing finance, a buyer has to arrange at least 20% of the property’s value from his funds. Home loan interest rates are at a record low, and hence, getting a home loan at an interest rate you desire wouldn’t be a problem. One thing you need to ensure is to be reasonable with your quantum of borrowing. This will ensure that your repayment of the loan takes place without much stress.
