Buying your first home is a huge decision because of the amount involved. One has to commit a large part of his savings and take his First Home Loan. But careful planning can help you achieve your goal in 10-15 years depending on your requirement.
Being prepared and knowing the investment avenues will help you to plan your first home purchase.
Here are the steps to financially plan your first home loan
Know what you are planning for
If you are in a hurry and planning to buy a house soon which is 1-3 years, you need to start saving for the down payment first.
Most banks & loan companies will provide a loan to finances 75-90% of the home amount.
A loan is a loan. Interest is a financial burden.
You need to visualize your requirement.
If you are looking at a Rs 75 Lakh home in the next 10 years, you need around 15 Lakhs as a down payment. If you save Rs 8000 per month and increase amount by 10% every year you can save Rs 15 Lakh in 10 years. Here the rate of return is just 3% – your savings bank interest rate!
You can use various calculators online to know the amount required.
But things are not east as they look.
The house available for Rs 75 lakh today, will cost more after 10 years. Inflation & increase in property price.
So, you need to invest more & a better rate of return.
Here are a few financial instruments for someone with a medium-to-high risk profile to finance the first home:
Bank or Post Office Recurring Deposits (RD)
Recurring deposit suits with people will regular income like salaried. The RD interest rates are better than Bank Savings account rates.
Investors can deposit a fixed amount every month in an RD account and earn an interest rate applicable almost equivalent to a fixed deposit (FD).
RD maturity period can be from 6 Months to 10 Years. Converting RD to FD after one year can give fixed regular returns.
Problem with FDs & RDS is RD may not necessarily beat inflation. But it makes you a disciplined investor. These days a lot of new small payment banks are providing attractive FD rates.
Equity Linked Savings Scheme (ELSS)
One needs to invest (up to Rs 1.5 Lakhs) under Sec 80C to save tax. This is every year. One can use ELSS as an accumulation device for Housing Goal.
As ELSS is an all-equity fund. Hence it falls under the high-risk category. But if you can understand -it can be used as a great investment as well as a tax-saving financial instrument. It is good for an investor looking to invest for 5 years plus. The fund also has a lock-in of three years.
Mutual Funds
One can choose equity mutual fund, debt mutual fund & hybrid as per his choice to invest. Investing in a mutual fund can help you beat inflation and save taxes also.
Mutual Funds provide benefits of diversification. One can choose to invest through SIP. The long duration of holding and investing in small amounts helps reduce risk which is market cycle-related risk and volatility.
When you are ready – Study the Financing Options
When you are ready with the maximum down payment, understand the financing options available.
A buyer can avail a bigger loan amount by applying for home loans jointly with co-applicants. So if your spouse is earning too and pays income tax, it is best to include him/her as co-applicant.
Apart from planning and investing for your home, you also need to maintain a good credit score or CIBIL score. A high CIBIL score helps you avail loan at an attractive interest rate.
Again to summarize:
- Plan as early as possible.
- Home is a goal so is arranging for the downpayment.
- Understand the requirement
- Plan the monthly savings
- Use the investment product mix to get the maximum benefit
- If availing a loan, understand the options & compare them
- Maintain CIBIL Score – Before & during the loan period.
I hope the article will serve you planning your first home loan in a better manner.