Arranging Only The Bare Minimum Down-Payment Will Cost You Dear

Raghu Sinha, 28, has a futuristic vision. The frugal software engineer started saving money for investing in property when he was 22. After six years of salting away, the Bengaluru-based professional has saved Rs 10 lakh and finds himself in a position where he can start looking for a home. He went ahead and found a property of his choice within a month, with a minor problem that the total cost of the property was Rs 50 lakh. Sinha knows most banks lend you only 80 per cent of the total value of the property—this means he would get Rs 40 lakh as loan and Rs 10 lakh have to be paid as the down-payment. The prospective home buyer heaved a sigh of relief thinking has just about made it. He has not, as a matter of fact! Even if we consider just the bare minimum, from where will the working professional arrange the stamp duty (5.6 per cent of the value) and registration charges (one per cent of the total value)?

If you are planning to buy a home, focusing all your energy on the loan part would end you up in a situation like Sinha's.

Barring a few, almost all of us have to depend upon borrowing to finance our property purchases. Precisely for this reason, most of the times all our thoughts are concentrated around procuring the home loan. We would like to initiate the purchase as soon as possible using the bare minimum down-payment. Such a move could result in the deal falling flat, causing you much heartburn.

Santanu Mitra, 44, a media professional wanted to buy an old property in Delhi. While the seller's asking price was Rs 80 lakh for a 2BHK, the bank agreed to lend only Rs 40 lakh for the property. The deal did not materialise. This example shows things will only turn more difficult if you are buying a property on resale. Banks generally are not enthusiastic about financing these properties and offer only 50 per cent of the value as loan.

If you somehow managed to realise the deal by taking a personal loan, the move would prove pernicious in the long run. It is worth mentioning here that you do not enjoy any tax benefits on personal loans and the interest charged on them is higher when compared to home loans.

It would be better to pay attention to the fact that there is no upper limit on the down-payment. The more the down-payment, the less the loan. Overall, the cost of the house purchase would be much less if you focused more on saving for down-payment than taking as a loan. A senior colleague recently bought a house for Rs 60 lakh. He tells me when he is done paying the loan, the total cost of the property would reach Rs 1.25 crore.  

But, why should you worry when banks these days are ready to fund your house purchase even if you can pay only five per cent of the total value as down payment? Do remember the fact that for each penny it lends you, a bank charges you a substantial interest on that.

It would only be wise to base your home purchase on your own savings; banks should only be assisting you in the process.