 "How to raise the downpayment for a house")
Buying a house for Rs 50 lakh? Remember, you need to pay at least 20 per cent of the money or Rs 10 lakh from your own pocket. Add another five to seven per cent as stamp duty and registration charge, some brokerage fee and sundry expenses and the final number of 'out-of-pocket' expense in property buying comes to a daunting Rs 15-18 lakh. How to raise it?
With the Reserve Bank of India disallowing banks from adding registration and stamp duty in the home loan amount, non-banking financial institutions, though marginally more expensive (10 to 25 basis points), should become the first choice for someone short of cash. Yet, this is only the first step and solves the problem of raising Rs 3-4 lakh. The rest, Rs 12-15 lakh, still needs to be funded.
Painless ways
A goal-based person who has planned for a house for some time and has saved through a systematic investment plan (SIP) in mutual funds or purchased good stocks, exiting these would provide good returns, especially in these times when the stock market is doing rather well. Still, remember that if you are divesting your portfolio completely for this, start a couple of SIPs immediately, so that the saving habit remains.
An option is to take a loan from family or a friend. Perhaps the easiest way out, as it will come at a zero-interest cost and the pressure of returning it immediately won't be there. Buying a house means servicing a home loan and another regular payment might make life tough.
Some pain
Then, if you have life insurance policies, you could take a loan. The maximum loan amount available under the policy is 90 per cent of the surrender value and 85 per cent in case of paid-up policies, including the cash value of bonus for endowment policies.
If one looks at Life Insurance Corporation of India's product, the rate of interest is nine per cent, to be paid half-yearly, the cheapest among loan rates. In addition, the pressure of repayment is less. You can either repay the loan with interest or continue paying the interest and allow the loan to be deducted at the time of the claim payments. Most financial institutions allow loans against policies based on the insurer's quotes. The minimum period of the loan is six months. What is good is if the policy becomes a claim due to maturity or death within six months from the date of loan, the interest will be charged only up to the date of maturity/death.
Painful ways
While loans from a parent or friend, selling investment and a loan from life insurance are the cheaper and zero or lower interest options, what should you do if these aren't available or don't add to the required amount?
The tricky part lies here. One way is to take a home improvement loan from the bank or housing finance company (HFC). "This is one of the more creative ways of raising money. But remember that if you are buying an under-construction property, the bank/HFC might not able to grant you a home improvement loan," says financial planner Suresh Sadagopan.
HDFC, for instance, offers a home improvement loan at 10.5 -11 per cent for loans up to Rs 30 lakh for the salaried. For loans above Rs 30 lakh, this rate is 10.75-11.25 per cent. For new customers, they fund up to 80 per cent of the requirement and for existing customers, 100 per cent. The maximum tenure is 15 years, almost as good as a home loan. State Bank of India charges 0.25 per cent over its existing rate of 10.10 per cent for a home improvement loan.
The important thing to note here is that both banks and NBFCs will look at the eligibility. That is, any lender will be comfortable funding a 40-50 per cent ratio of loan to take-home salary. If it exceeds this percentage, it would be difficult. For example, if your take-home salary is Rs 1 lakh a month, the lender would be happy with an equated monthly instalment (EMI) of Rs 40,000-50,000, at best. However, this is inclusive of all loans. So, if there is a home-improvement loan that translates into an EMI that exceeds this limit, they will not sanction it. In such a situation, you can add a co-applicant who is working. Whether a parent or wife or brother, banks will allow it.
The worst thing is to take a personal loan. With rates at 14-20 per cent and the tenure limited to five-seven years at best, it means immense pressure on your finances. Also, since the tenure is small, it means very high EMIs that can disqualify you for a home loan if the amount is substantial.
For example at 11 per cent for 15 years, a home improvement loan of Rs 5 lakh means an additional EMI of Rs 5,683. The same amount raised through a personal loan at 15 per cent for five years means an EMI of Rs 11,895, more than double the amount. For someone seeking a high amount of home loan, this can be a telling difference when the bank adds all EMIs to decide on eligibility.
Sadagopan says one should avoid it at all costs. "People keep on adding loans without realising the impact they are having on their finances. Some take a loan to pay the initial down payment, then they take a home loan, and after some years, another home improvement loan… and keep on servicing loans instead of saving for the future," he says.
With the Reserve Bank of India disallowing banks from adding registration and stamp duty in the home loan amount, non-banking financial institutions, though marginally more expensive (10 to 25 basis points), should become the first choice for someone short of cash. Yet, this is only the first step and solves the problem of raising Rs 3-4 lakh. The rest, Rs 12-15 lakh, still needs to be funded.
Painless ways
A goal-based person who has planned for a house for some time and has saved through a systematic investment plan (SIP) in mutual funds or purchased good stocks, exiting these would provide good returns, especially in these times when the stock market is doing rather well. Still, remember that if you are divesting your portfolio completely for this, start a couple of SIPs immediately, so that the saving habit remains.
Also Read
An option is to take a loan from family or a friend. Perhaps the easiest way out, as it will come at a zero-interest cost and the pressure of returning it immediately won't be there. Buying a house means servicing a home loan and another regular payment might make life tough.
Some pain
Then, if you have life insurance policies, you could take a loan. The maximum loan amount available under the policy is 90 per cent of the surrender value and 85 per cent in case of paid-up policies, including the cash value of bonus for endowment policies.
If one looks at Life Insurance Corporation of India's product, the rate of interest is nine per cent, to be paid half-yearly, the cheapest among loan rates. In addition, the pressure of repayment is less. You can either repay the loan with interest or continue paying the interest and allow the loan to be deducted at the time of the claim payments. Most financial institutions allow loans against policies based on the insurer's quotes. The minimum period of the loan is six months. What is good is if the policy becomes a claim due to maturity or death within six months from the date of loan, the interest will be charged only up to the date of maturity/death.
Painful ways
While loans from a parent or friend, selling investment and a loan from life insurance are the cheaper and zero or lower interest options, what should you do if these aren't available or don't add to the required amount?
The tricky part lies here. One way is to take a home improvement loan from the bank or housing finance company (HFC). "This is one of the more creative ways of raising money. But remember that if you are buying an under-construction property, the bank/HFC might not able to grant you a home improvement loan," says financial planner Suresh Sadagopan.
HDFC, for instance, offers a home improvement loan at 10.5 -11 per cent for loans up to Rs 30 lakh for the salaried. For loans above Rs 30 lakh, this rate is 10.75-11.25 per cent. For new customers, they fund up to 80 per cent of the requirement and for existing customers, 100 per cent. The maximum tenure is 15 years, almost as good as a home loan. State Bank of India charges 0.25 per cent over its existing rate of 10.10 per cent for a home improvement loan.
The important thing to note here is that both banks and NBFCs will look at the eligibility. That is, any lender will be comfortable funding a 40-50 per cent ratio of loan to take-home salary. If it exceeds this percentage, it would be difficult. For example, if your take-home salary is Rs 1 lakh a month, the lender would be happy with an equated monthly instalment (EMI) of Rs 40,000-50,000, at best. However, this is inclusive of all loans. So, if there is a home-improvement loan that translates into an EMI that exceeds this limit, they will not sanction it. In such a situation, you can add a co-applicant who is working. Whether a parent or wife or brother, banks will allow it.
The worst thing is to take a personal loan. With rates at 14-20 per cent and the tenure limited to five-seven years at best, it means immense pressure on your finances. Also, since the tenure is small, it means very high EMIs that can disqualify you for a home loan if the amount is substantial.
For example at 11 per cent for 15 years, a home improvement loan of Rs 5 lakh means an additional EMI of Rs 5,683. The same amount raised through a personal loan at 15 per cent for five years means an EMI of Rs 11,895, more than double the amount. For someone seeking a high amount of home loan, this can be a telling difference when the bank adds all EMIs to decide on eligibility.
Sadagopan says one should avoid it at all costs. "People keep on adding loans without realising the impact they are having on their finances. Some take a loan to pay the initial down payment, then they take a home loan, and after some years, another home improvement loan… and keep on servicing loans instead of saving for the future," he says.