By Praveen Parthasarathy and Ramkumar R S
Purchasing a home in a city is a major life time goal for most people. The biggest hurdle that delays the process of buying a dream home is the lack of funds to make the down payment (15%-20% of the Property Value). Taking another loan to arrange for the down payment, does not work, as it reduces the loan eligibility on the home loan. And by the time we get around to accumulating enough savings for the down payment, the property prices would have also gone up. For example, someone who is ready to pay an EMI of Rs 50,000 for a home loan EMI, struggles to save even Rs 20,000 PM for down payment.
But it is possible to accelerate your savings and complete your Dream Home Purchase faster. Here is a simple 2 step approach:
Step 1: Calculate your Home Loan Eligibility and Home Price Budget.
Take the Net Take Home pay of yourself and your spouse. Multiply that by 0.5 (50%). That is your total EMI paying capacity. Now subtract all the current EMI’s you are paying (such as Car, Personal Loan etc). That will give you the EMI Paying Capacity for a home loan.
Use an EMI Calculator to find out how much home loan you will be eligible for. The loan amount at which the EMI is equal to your EMI Paying capacity is your eligibility. If you are younger than 38, assume 20 years as the loan duration (Tenure). If you are older, 58 minus Your Age will be the tenure.
The price budget for your FLAT/Home = Home loan eligibility calculated as above, divided by 0.8 (Meaning you have to save and contribute the balance 20%)
Example :
Net Pay (Self + Spouse) = Rs 1,20,000
50% of Net pay = Rs 60,000
Existing Loan EMIs = Rs 8,000
Home Loan EMI capacity = Rs 52,000
Home Loan Amount for 20 years at Rs 52,000 EMI and 9% interest = Rs 58 Lacs
Home Price Budget : Rs 58/0.8 = Rs 72.5 Lacs
Down payment = Rs 14.5 Lacs
Step 2: Start the EMI Right Away, in an RD
If you are ready to buy your dream home, the best way to accelerate your savings towards the 20% down payment, is to assume you have got 100% finance and the EMI starts from next month.
So the RD amount = the EMI amount you will be paying once the home is purchased. Open an RD in a modern bank like Equitas Bank that offers 7-8% interest. Use any RD Calculator to calculate the maturity amount for the given RD amount. Adjust the tenure of the RD (6 / 12 / 18 / 24 months etc) such that the maturity amount is equal to or greater than 20% of the Home Price Budget. The Tenure selected is the waiting period after which you can actually own a dream home, because you would have saved the Down payment in an accelerated manner.
If you are going for a flat from a reputed CREDAI certified builder who has a good track record of on time delivery, you may even book the flat as soon as you accumulate the 5% booking amount and take possession as soon as you save the balance 15%. In this case you have to open RD accounts two times, once for the 5% booking amount and then again for the balance 15% contribution.
Example 1:
RD Amount = Rs 52,000 (Same as EMI that you are going to pay once the home is purchased)
RD Maturity @ 7% = Rs 15.2 Lacs in 27 Months
Example 2:
RD Amount = Rs 52,000
RD Maturity @ 6% = Rs 3.71 Lacs in 7 months (Booking)
RD Amount = Rs 52,000
RD Maturity @ 7% = Rs 13.42 Lacs in 24 months (Possession)
Budgeting for Interiors
Most home loan companies include the cost of Interior work (not for ACs and Furniture but for Cupboards and Kitchen Cabinets) in the cost of the house, So the home price budget you arrived at can be inclusive of that.
Increasing your Home Price Budget
If you are paying EMI for any high interest loan, whose balance tenure is 3 years or less, it is better to save and pre-close that loan, so that your home loan eligibility increases substantially. You could time that pre-closure to coincide with the maturity date of your down-payment RD.
You could also go for a longer RD, like 3-4-5 years and also factor-in your income growth over the next 3-4 years, so that you can push your home price budget higher than what you can afford today. But you should also factor in the increase in real estate prices during the same period.
The bottom line:
By saving 30% to 40% of your net take home pay (yours + spouse), you can accelerate the time taken to buy your dream home. Opening an RD which will be equal to the EMI that you are willing to pay for the home loan, is the best way to do that. It is like getting 100% Finance for your home. And the EMI starts next month.
Dream Home Planner
The Ashaa Dream Home Planner is in Beta and the link will be published here soon.. It will take all the inputs necessary such as your income, existing EMIs, expected increase in your income over the next few years, expected inflation in the Home prices over the next 3-4 years, any high cost loans you could pre-close to increase home loan eligibility etc. and present you with a plan.
And then it will take you directly to open the RD account through 100% digital mode, so that you can start your home purchase plan right away.
About the Authors
Ramkumar R S, is the founder of Save First Foundation, a volunteer lead, not for profit organisation focused on promoting long term savings among middle class individuals. He is also the founder and CEO of milliGOLD. For free one to one, personalized financial counselling sessions (1 hour), please book your appointment at www.savefirstfoundation.com or contact savefirstfoundation@gmail.com. Also check out the blogs, case studies, values and guidelines at our website. Do join SFF as a member or volunteer.
Praveen Parthasarathy is the co-founder of ashaa.ai. He is a Fin-tech specialist designing and creating fintech products.