Owning a home is a dream for many Indian families. Earlier, homes were built brick by brick. Today, it is built EMI by EMI. If you are planning to buy a home through a loan, you know that one of the crucial parts is saving up for a down payment. As a home buyer in metro cities, you need to set aside at least 10%-20% of the cost of the home as a down payment. So, how can you save for a down payment on a house?
Calculate the down payment required
Most banks give a loan of 80-90% on the cost of the property, which is paid in equated monthly instalments (EMIs). The remaining 10-20% of the property cost has to be paid upfront. This amount is called the down payment. While you may hope to get 90% of the cost of the property as a loan, you must make a provision for a 20% down payment and a little more for contingencies.
Let us suppose your budgeted home costs ₹1 crore. Accordingly, you must set aside ₹20 lakhs as the down payment and around ₹2 -₹3 lakhs as a contingency fund. This is how much you must save for a down payment on a house.
It is always advisable to make a higher down payment as it reduces your debt burden and the interest outgo. Let's understand this with the help of an illustration.
Scenario |
20% Down Payment |
35% Down Payment |
Total Cost of House |
₹1 crore |
₹1 crore |
Loan Amount |
₹80 lakhs |
₹65 lakhs |
Down Payment |
₹20 lakhs |
₹35 lakhs |
Loan Tenure |
25 years |
25 years |
Interest Rate |
8.50% |
8.50% |
Interest Amount |
₹1.13 crore |
₹92 lakhs |
Monthly EMI |
₹64,418 |
₹52,340 |
Total Amount Payable |
₹1.93 crore |
₹1.57 crore |
Difference |
₹36.23 lakhs |
For illustration purpose only.
As seen in the above illustration, by increasing your down payment by ₹15 lakhs, you can save ₹36 lakhs on the total loan payable amount.
Also Read: [Now is the perfect time for your dream home!]
Draw a budget
When you have a goal to reach, especially a quantifiable goal like saving for a down payment, it is necessary to understand the inflow and outflow of money. Drawing up a detailed budget and specifying the expenses for the month will help in cutting down on unnecessary expenses and saving for your future home. The time horizon is of vital importance. If the period is short, be very stringent about spending and avoid luxuries that can be postponed.
Open a Savings Account
As you start saving, deposit the funds in a savings account opened only for the purpose of saving for a house down payment. This way, you can secure the funds and also earn interest on them. Axis Bank Digital Savings Account, which can be activated within 60 minutes without any paperwork or hassle, is a good option for a goal-oriented Savings Account.
Invest wisely
The funds in the Savings Account can be invested depending on the time horizon. If you have a good amount of time, one of the best ways to save for the house down payment is to invest the funds in Mutual Funds through SIPs. For instance, one can start investing Rs 30,000 through monthly SIP in a hybrid fund to create a corpus of ₹22 lakhs in five years assuming growth of 8% p.a.
However, if the down payment is soon due, the funds can be invested in Fixed Deposits that provide decent returns along with security. With Axis Bank Digital Fixed Deposit Account, an industry-first digital KYC Fixed Deposit, you can avail of attractive FD rates, zero issuance fees and no premature withdrawal penalty (up to 25%). This will keep your funds safe and also generate good returns.
Check eligibility for government schemes
Many government schemes are there to help make housing more affordable for you. Before buying a home, study the existing schemes and check your eligibility criteria. If you are eligible for a particular scheme, then you must apply for it and avail the benefits. This will reduce the cost of buying and the subsidy can be used for decreasing the down payment.
Conclusion
Purchasing a dream home is a once-in-a-lifetime event for most people. This dream can be made into reality with proper planning of finances and making provisions for a down payment. Thus, you must first set a goal, track your expenses, and save any excess income that is to be wisely invested.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision