These five thumb rules will help you quickly save money for a down payment and make your dream of owning a home come true.
Buying a home is every earning person’s dream. But it isn’t as easy as it sounds. It needs prior planning and saving money years in advance. After deciding how much you can afford to spend on a home, the first and most significant step is to arrange and save money for down payment on house.
But setting aside money takes serious discipline amid the race to achieve a better lifestyle.
Also, you should consider where you can park your money to maximize returns. Whether to keep it in a bank savings account or invest in mutual funds or government bonds depends entirely on how much time you have.
Here are a Few Pointers to Help Home Buyers Save Quickly For a Down Payment
In India, the cost of real estate has soared 4% YoY (year-on-year) from January-March 2022. In metro cities like Bangalore, Mumbai, and Delhi, the average realty price is between ₹7,363-₹19,557 per sq ft. Hence, people naturally gravitate toward home loans, and arranging the down payment is not a child’s feat.
Banks prefer lending money to aspiring homeowners who can put in one-fifth or at least 20% of the property’s appraised value. Here are a few tips you can consider to achieve this goal.
1. Plan Early
In India, the average age of home buyers presently is 24-25 years. But often, they make the home-buying decision only a year or two in advance. This leaves them almost no time to save the down-payment amount and end up paying more loan amount than they originally anticipated.
Therefore, if you are planning to buy a home, plan at least 5 to 8 years in advance and invest your money in a way that has ample time to grow. Set your goal early and work toward it.
2. Apply The 50-30-30 Rule & Stick To It!
People often get confused about how much they should spend to buy a new home. Realistically, you should consider five times your annual salary as the home’s total cost. So, when you have to pay 20% of it as a down payment, you wouldn’t struggle much to arrange it.
As we mentioned, start arranging the money 5-8 years before and stick to the 50-30-20 rule. According to this rule, 50% of your take-home salary should be used for your fixed expenses such as home rent, food, utilities, children’s education fees, etc.
The remaining 30% is for your discretionary expenditures, such as shopping, travel, salon appointments, etc. While you are saving for your home’s down payment, a major portion of the 30% discretionary expenses can be spent on that. Finally, 20% must be set aside for savings.
3. Make Lifestyle Changes
When your salary increases, your cost of living also changes. You tend to prefer finer things, live in a better home with luxurious amenities, etc. But saving money for a house needs a major shuffle in your lifestyle. Just relocating to a smaller home can save you much money.
Furthermore, spending less on vacations, entertainment, and memberships can help you save a ton of money toward the down payment on a home. Also, consider starting a side hustle. The more income stream you have, the faster you can build your down-payment fund.
4. Invest Aggressively
Remember, your money will not grow if it sits in your savings account. So, invest the money you want to save monthly on aggressive mutual funds or start a SIP directly to the stock market.
The more time you give to your corpus, the higher the value of your money will be. Only by investing in various tools, you’d be able to beat inflation.
5. Monetize Your Other Assets
If you still fall short on funds after saving for your new home’s down payment, consider monetizing your other assets like bank FDs or your life insurance policy.
You can break your FDs or take loans against them. Based on your FD deposit amount, you can borrow 90-95% of the money. Similarly, you can borrow 80-90% of the surrender value from your life insurance. But the only stipulation is that you pay it back with interest. It is called an overdraft.
In case of an overdraft from FD, the interest you have to pay is 1% more than the interest rate the bank was paying you. For a loan against a life insurance policy, the interest rate starts from 10%. Despite the high-interest rate, they disburse the borrowed money within 72 hrs of approval.
Alternatively, you can withdraw a portion of your employee’s provident fund. You do not have to pay it back. If you take this road, you will lose a major chunk of your retirement money.
Avoid taking personal loans or using credit cards, as they only increase your debt burden.
Based on the property you choose, your down-payment amount could be some thousands or even lakhs of rupees. So, while choosing your new home, try to think practically. Your home should also meet all your needs and favors your financial state.
On the other hand, your home’s monthly EMI should not be more than 35-40% of your take-home salary. This way, not only will you be able to do your savings and make your essential expenses, but you will also fulfill your dream of owning a home.