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Build-A-Fund: Home Edition 🏠

Most people find it nearly impossible to purchase a home without a loan. With real estate prices so high, EMIs are the only way to own the home of your dreams.

Banks typically lend 70-80% of the home's value, and the rest of it must be paid upfront in what’s called a down payment.

Homes are always so costly that even saving for a down payment can be a huge challenge. Yet, here are some ways to simplify this daunting process!

What Is My Budget?

The funny thing about housing is that you always want to peak out your affordability. No matter how rich you are, you will always go to the maximum lengths you can to buy a house.

A mix of sentiment, usability, and long-term use make us do this perhaps!

But here’s how you can put a number to your budget, rationally!

  1. How much EMI?: Don’t let EMIs take up more than 40% of your gross income. Say you earn Rs. 24 lakh per year. This is Rs. 2 lakh per month. Your maximum spend on EMIs should be about Rs. 80,000 per month.

  2. How much home loan?: How much of a loan would come in Rs. 80,000 per month? At 8% interest rate and 20 years of repayment, you can get a home loan of Rs. 1 crore.

  3. How much down payment?: If you can get a home loan of Rs. 1 crore, and recommended down payment is 30%, your down payment amount comes to Rs. 40 lakh.

  4. How expensive a house?: The budget for your home is Rs. 1.4 crore, made of a down payment of Rs. 40 lakh and a home loan of Rs. 1 crore.

How Do I Save Up?

A couple of problems are sorted here - the budget, and home loan (assuming you will sort this out!). But still, we do need a down payment of Rs. 40 lakh. Here are a few ways to save that up:

  1. Consider making lifestyle changes: You can help yourself save for that down payment on your home by ideally reducing expenses like vacations, entertainment, and subscriptions you could do without for at least two to three years.

  2. Monetise your other assets: Consider selling some of your heirlooms or liquid assets to help fund your down payment. Money sitting in the form of unused property, old share certificates, and jewellery can be better utilised as home equity.

  3. Follow the 50-30-20 plan: Your fixed costs should account for 50% of your take-home pay, other expenses should account for 30%, and savings should absolutely account for at least 20% of your take-home pay.

  4. Automate savings: The best way to avoid falling behind in financial discipline is to automate. Setting up an Auto-SIP in which the amount is deducted each month from the start is a wise move.

Where To Invest?

This depends a lot on your time horizon - or when you need the money. Here’s a rough allocation you can use:

  1. Within 3 years: 30% liquid, 50% debt, 20% equity

  2. Between 3-5 years: 50% debt, 50% equity

  3. After 5 years: 20% debt, 80% equity

The instruments within the asset allocation can vary. Here are some options:

  • Debt mutual funds are smart for their safety and decent returns potential, which can be considerably higher than what you can generate from a savings bank account. Based on when you'd like to purchase a home, you can select a debt fund and keep your savings, either in a lump-sum or through SIP.

  • Direct Equity Investment through smallcase if your time horizon is more than 5 years. The faster your money grows, the shorter and lower your loan term will be. Equity allocation should be done carefully because liquidity issues may cause your home problems to be delayed if a recession occurs unexpectedly.

Some Additional Tips

Due to the astronomical interest rates they would incur, credit cards and personal loans should always be avoided. This would, in turn, increase your debt burden in the long run.

The bottom line is that you should be aware of how challenging it is to save for a down payment and that there is no substitute for sound money management when it comes to doing so.

If you don't plan ahead and make the right investments, saving for the down payment can be a time-consuming process. To make the best investment choice, be aware of your down payment requirements and the time frame you'd like to buy. Consider time and use it to your advantage.

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