Plan Your Investment To Buy Your Dream Home
- 4m0•
- 17 Apr 2023
In Indian society, one of the indicators that you have come of age is when you own a house. Most Indians dream of having a place they can call their own. But owning that dream home requires considerable planning. While getting a home loan may not be very challenging, you will have to arrange for a down payment as well.
The Home Loan
Home loans are considered safe as the house itself acts as security. Currently, you will be able to get a home loan at an interest of about 8.5% per annum. That said, most banks will give you a loan of anywhere between 65% and 85% of the home’s market value. You will have to arrange the remaining amount. That is, if you are looking to buy a property worth Rs. 50 lakh and the bank agrees to fund 80% of this – you will have to arrange for Rs. 10 lakhs before the bank releases the rest of the amount. This article will help you decide how to invest your money to arrange these funds at the earliest possible.
Start Early
The earlier you start, the easier it would be to build the funds for your dream home. As you will have to repay the home loan by the time you retire, the earlier you take the loan the longer the tenure you can get. So, if you apply for a loan in your late 20s, you will be able to get a tenure of up to 30 years. This will keep the EMI burden low, leaving you with more money to invest at higher rates. The other benefit of starting early is that the magic of compound interest will allow you to pay the later EMIs out of the interest you earn on your investments rather than from your regular salary.
Mutual Fund SIPs
The key to arranging the funds for the down payment is disciplined investment. Make the savings automatic by signing up for a mutual fund SIP to invest in share market at a set period . These are low-risk investments that give a decent return in the long term. The projected returns range from 10% to 18% based on the kind of fund you choose. Considering an equity fund with a return of 16% per annum and an investment of Rs. 10,000 per month, it should take you less than 6 years to put together Rs. 10 lakhs.
Invest For Your EMIs As Well
You shouldn’t stop just because you have saved up for the down payment. Continue with your saving plan as it will allow you to pay up the future EMIs as well. Most people wonder if they should close their loan as soon as possible – well, it is a good thing to do if having a loan to repay makes you feel uncomfortable. On purely economic terms, it is better to pay your loan as slowly as possible. This is because you would be able to generate a much greater return on other investments. Let me explain this through an example:
Assume you take a loan of Rs. 40 lakhs at 8.5% a year. You could choose between a tenure of 20 years and 25 years. The loan repayment schedule for these would look like this:
| Loan Amount (Rs.) | Interest rate | Tenure | EMI (Rs.) | Total amount to be paid in 20 years | Total amount to be paid after 20 years |
|---|---|---|---|---|---|
40 lakh | 8.5% | 20 year | 34713 | 83.31 lakh | NIL |
40 lakh | 8.5% | 25 year | 32209 | 77.3 lakh | 15.7 lakh |
On the face of it, you are paying about Rs 23.7 lakh more if you choose the longer tenure. But you will be able to save Rs. 2,504 per month on the EMI payment. This amount can be invested in the same equity fund as mentioned above. Assuming a 16% return per annum, at the end of 20 year period you would have amassed a fund of Rs.43.8 lakh. Now, if you pay off the outstanding home loan amount with this money – you will still have additional savings of Rs. 28.1 lakh. That said, the returns from the stock market are unpredictable and carry a risk .Based on your risk appetite you could choose a fund with a lesser promised return and monitor the share market live to rebalance your portfolio. . As long as the return on investment is higher than 8.5%, choosing the longer tenure is economically sound. Needless to say, you can also claim tax deduction on the interest component of the EMI upto a maximum of Rs 2 lakhs under Section 24 of Income Tax Act.
Pradhan Mantri Awas Yojna – Credit Linked Subsidy Scheme
You should take advantage of PMAY-CLSS if you are eligible. This scheme is open to any family with a household income of under Rs. 18 lakh per annum for the first house that they own.
| CLSS Scheme Type | Eligibility Household Income ( Rs.) | Carpet Area-Max (sqm) | Interest Subsidy (%) | Subsidy calculated on a max loan of | Loan Purpose | Validity of the scheme | Max Subsidy (Rs.) | Woman Ownership |
|---|---|---|---|---|---|---|---|---|
EWS and LIG | Up to Rs.6,00,000 | 60 sqm | 6.50% | Rs.6,00,000 | Purchase/Self Construction/Extension | 31/03/2022 | 2.67 Lacs | Yes |
MIG 1 | Rs.6,00,001 to Rs.12,00,000 | 160 sqm | 4.00% | Rs.9,00,000 | Purchase/Self Construction | 31/03/2019 | 2.35 Lacs | Not Mandatory |
MIG 2 | Rs.12,00,001 to Rs.18,00,000 | 200 sqm | 3.00% | Rs.12,00,000 | Purchase/Self Construction | 31/03/2019 | 2.30 Lacs | Not Mandatory |
Availing this scheme will reduce the burden of EMIs on you. Further, remember that you can avail this loan as long as neither you nor your spouse owns a house property – individually or jointly. While buying your dream home requires you to take up a lot of financial responsibility, the peace of mind and sense of achievement it brings are unmatched.
Also Read:
