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Tips for arranging funds for making the down payment for a house


The Coronavirus pandemic has forced many people who live on rent, to start considering a home purchase. Even in a post-COVID-19 world, remote working would become common in our professional lives, while being at home and maintaining distances would be a crucial part of our physical survival. In this scenario, property ownership would become even more important, as owning a property gives one a sense of security.

However, to buy a home using housing finance, a buyer has to arrange at least 20% of the property’s value from his own funds. Interest rates are at a record low – you can get loans at 6.55% interest at present. Moreover, there is no lack of ready-to-move-in homes. PropTiger.com data show that India’s nine prime residential markets currently have an unsold stock of nearly 7.39 lakh units. Developers are also offering benefits to buyers, in the form of waivers during the ongoing festive season.

Now, how can a potential buyer arrange for the down payment money, to finalise his dream home?

 

How to arrange funds for the down payment for a house

 

Take a loan from family members

Check if your parents or spouse can help you with the down payment, even if you are taking this money as a debt and plan to return it in due course. Not only would you save a great deal of time, energy and paperwork but also secure a lender, who will be more compassionate and sensitive if you are unable to repay the loan within a specified timeline, owing to some unforeseen event. If you plan to pay an interest to this family member, you will also be able to enjoy tax deductions on this payment.

See also: Should you take loans from family members to buy a house?

Word of caution

You run the risk of damaging your personal relationship, in case you fail to repay the money as planned. Treat the entire arrangement as a professional one and meet your obligation accordingly.

 

Withdraw money from your provident fund (PF) account

The Employee Provident Fund Organization (EPFO) allows subscribers to withdraw a certain portion of their provident fund (PF) money for home purchase and various related purposes. A subscriber could avail of a loan that is equal to 36 times his wages, for property purchases.

 

PF withdrawal reason Withdrawal limit
For buying a plot 24 months’ basic salary and DA
For constructing a house 36 months’ basic salary and DA
For buying a ready-to-move-in house 36 months’ basic salary and DA
For home improvement/renovation 12 months’ basic salary and DA
For repayment of housing loan 36 months’ basic salary and DA.

See also: How to use your provident fund to finance a home purchase

Word of caution

However, note that withdrawing from your PF account might take some time and requires paperwork. You would also have to keep your employer informed about your purchase decision, as they will have to verify your application and send it to the local EFP office. Also note that in case you are leaving your employment, you will be able to withdraw the whole amount lying in your PF account, subject to certain conditions.

 

Take a loan against insurance policy

A policy holder can get between 80% and 90% of the surrender value (the value you get when you terminate the insurance plan voluntarily), of the insurance policy as loan. Let us understand this with an example. If you have an insurance cover of Rs 50 lakhs and its surrender value is Rs 20 lakhs at the time of requesting for the loan, you may get Rs 18-19 lakhs as loan.

Word of caution

The interest rate on loan against insurance policies is higher than home loan rates and ranges from 10%-12%. Also note that a loan can be taken only against traditional life insurance policies and not against term plans. The policy holder needs to pay the interest on the loan, along with the regular premiums. In case of default on any of these counts, the policy will lapse.

 

Take a personal loan

This should be your last option and must be used, only when you cannot find any other alternative. This is because personal loans are unsecured and hence, cost more than any other type of loan. You may end up paying nearly 11%-20% interest on personal loans.

Word of caution

“Personal loans are only recommended when the buyer has no other option. Personal loans can elevate the financial burden on buyers, with its higher interest rates and their shorter terms for repaying monthly installments. Lower interest personal loans are only possible, if one has a good credit score and stable income. So, try and maintain a good credit score from the very beginning, if a personal loan is your only option,” says a senior executive at a leading Mumbai-based Fintech, requesting anonymity.

 

FAQs

How much money can I get as a home loan?

Banks generally provide up to 80% of the total value of a property as loan.

How much down payment should I make for a house?

You can pay more than the minimum down payment, if your savings permit you to do so.

 

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