Dos and Don’ts of Accumulating a Down Payment on a Home Loan

The earlier you start investing, the more time the money has to grow and maximize the benefits of the power of compounding.

RBI guidelines allow lenders to finance up to 75-90% of the cost of the property in the form of a home loan. The rest must be provided by the buyer from his resources in the form of a deposit or a contribution of margin. Here are a few dos and don’ts of building a mortgage down payment:

To do

Start as early as possible

The famous phrase “the early bird takes the worm” is ideal when it comes to investing for the rapid achievement of crucial life goals such as the down payment of a mortgage, the retirement corpus, the studies. superiors of the child, etc. The earlier you start investing, the more time you have your money can grow and maximize the benefits of the power of compounding. When planning a home loan, start by estimating the down payment amount after taking into account the value of the property, your existing income, your debts, and the LTV ratio. Then choose the optimal investment instrument based on your risk appetite and your investment horizon.

Try to make a larger deposit

The ratio of the cost of the property financed by the lender is called the LTV ratio. This is fixed, based on the credit risk assessment of the loan seeker’s lender. You should try to accumulate at least 10-25% of the value of the property to ensure that you are financially prepared for a home loan.

Because paying a larger down payment reduces credit risk for lenders, home loan applicants who make larger down payments are more likely to get loan approval. Some lenders also offer lower interest rates than those who opt for a lower LTV ratio. Therefore, applicants looking to lower their interest charges should aim to create larger corpora for the loan down payment. However, when creating this corpus, avoid compromising your emergency fund and your investment corpus intended for critical financial purposes. Otherwise, a financial emergency or the deadline for a crucial financial goal could force you to resort to loans with higher interest charges.

Not to do

Tap into reserved investments

Homebuyers often make the mistake of buying back their investments set aside for crucial financial purposes, including the child’s retirement and higher education corpus, to make a down payment on the home loan. However, this may prevent them from achieving the financial goals set due to the repurchase of restricted investments otherwise intended to achieve this corpus. It may even involve the possibility of recording losses while redeeming market-related investments during the bear market phase.

Worrisome emergency fund

The main goal of maintaining an adequate emergency fund is to deal with unforeseen financial demands or disruptions in income due to sudden job loss, serious illness, disability or loss of life. other adverse life events. Ideally, the size of this fund should equal at least six months of unavoidable monthly expenses such as IMEs, utility bills, insurance premiums, rent, SIPs, etc. Hence, you should avoid using your emergency fund for other purposes like a home loan down payment. This may require you to redeem your reserved investments and / or avail high cost loans to deal with financial emergencies.

Loan available to finance the down payment

Many home loan seekers borrow funds to make down payment arrangements. While options like personal loans may seem like a quick way to secure the funds for a down payment, it can have two consequences. First, lenders generally prefer to lend to borrowers whose total EMI to monthly income ratio is between 50% and 60%. Applying for a loan to finance the down payment can increase this ratio, reducing your overall mortgage eligibility. Second, submitting multiple claims can hurt your credit score. Each new loan application is reported to the credit bureaus, which in turn reduce your credit rating by a few points. A reduced credit score would further reduce your mortgage eligibility and your chances of approval.

The author is responsible for home loans,

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