Ideally, one should plan a house purchase well in advance so that they get sufficient time for arranging (or better still, saving for) the downpayment amount.
It’s a general practice that when you take a home loan, you get a loan for only 80% of the purchase price. Your home loan wouldn’t fund the complete purchase amount. At times it may be higher and at times it may be lower. But for this discussion, let’s stick to 80% for simplicity.
And what is the need for this downpayment?
Because lenders want you too to pitch in the purchase and share their risks. It’s like having skin in the game. So down payment is basically a sort of margin money for a loan that has to be paid up-front by the homebuyer. And once a borrower is capable of bringing in some money of his own on the table, it provides lenders with some reassurance about the borrower’s financial commitment.
As an example of the concept of downpayment, if you wish to purchase a house of Rs 50 lac, then you will get a loan for only Rs 40 lac. The remaining amount of Rs 10 lac (which is 20% of total cost) is to be brought in by the borrower on his own.
And it’s not like people don’t save for the downpayment amount. Most of them do save something or the other. But many times, one is unable to save up the required amount and due to one reason or the other, it becomes necessary to go in for the house purchase immediately.
I can go on about why it’s the ideal option to save enough money to be able to make the down-payment for your house purchase and how to manage home loan properly. But I don’t want to take a moral high ground here. People have different reasons for not being able to do so. So let’s leave that out for now.
So what to do if you do not have the amount necessary for downpayment?
Or if you are unable to liquidate existing savings as they are locked in some instruments which cannot be liquidated immediately and the option of waiting to make the purchase is not there?
And all this is assuming that taking financial help from family and friends is also not in the picture.
One option is to take a personal loan to make the downpayment.
Personal loans as you know don’t have any restriction to end-use and so, you can avail a personal loan for a home downpayment as well.
I would like to repeat here that ideally, it’s best to save up the downpayment amount yourself. But if that’s not possible and you need to make the purchase immediately (and you cannot take help from others), then taking another loan, more specifically a personal loan is something that can be considered. But with caution.
Let’s take an example to understand this better.
Suppose you plan to purchase a house of Rs 50 lac. And you unfortunately have only Rs 6 lac saved up earmarked for the house downpayment whereas the requirement is Rs 10 lac. Also, your monthly income is Rs 1 lac per month and your regular living expenses are Rs 50,000 per month. That is, you have about Rs 50,000 per month of surplus that can be used for servicing EMIs, etc.
Now, as mentioned earlier, lenders will give loans for house purchases only to the extent of 70-90% of the value of the property. In general and as a median case, it’s closer to 80%. So for our example of Rs 50 lac, the maximum home loan that you can get is 80% of the cost, i.e. 80% of Rs 50 lac – which is Rs 40 lac. The remaining is Rs 10 lac which is to come from you as downpayment.
There is another factor to consider. And that is your repayment ability. Technically and at times referred to as FOIR (Fixed Obligations to Income Ratio), it is an internal way for lenders to assess how much a person can comfortably service in loan EMIs. As per common practice, its about 40% of your income. That is, the lenders will only lend you to the extent (via all loans you have across multiple lenders) so that the monthly EMI obligations do not exceed 40% of your monthly income. In our example, your income is Rs 1 lac. So your EMI servicing capability in eyes of the lenders is limited to 40% of Rs 1 lac, i.e. Rs 40,000 per month.
(Read more about How much home loan to take?)
Now we know 3 things:
- Banks will give you a home loan of only up to Rs 40 lac.
- The remaining Rs 10 lac (in this example) is to come from you. You have Rs 6 lac saved up. So the remaining Rs 4 lac is to come from the personal loan. And that too will have its EMI.
- Your EMIs (for all loans) cannot exceed Rs 40,000 per month.
Now let’s see how much home loan EMI you need to pay.
For Rs 40 lac home loan and assuming an 8% home loan rate, different loan tenures will have different EMIs as follows:
- 30-year loan – Monthly EMI of Rs 29-30,000
- 25-year loan – Monthly EMI of Rs 30-31,000
- 20-year loan – Monthly EMI of Rs 33-34,000
- 15-year loan – Monthly EMI of Rs 38-39,000
- 10-year loan – Monthly EMI of Rs 48-49,000
Since your EMI capability is limited to Rs 40,000 per month, you might be tempted to first look at the 15-year loan tenure where EMI is Rs 38-39,000 per month (which is almost the same as your capability).
But let’s not forget that you also need to take a personal loan for downpayment.
So its not just home loan EMI that is capped at Rs 40,000.
Rather, the equation is: Home Loan EMI + Personal Loan EMI = Rs 40,000
So before deciding the home loan tenure, let’s first see the personal loan EMIs for your requirement of Rs 4 lac (rest Rs 6 lac come from your savings).
Do note that the interest rate for personal loans is much higher when compared to the rate of interest charged on home loans. Generally, personal loan rates range from 10% to 20% and above. And the reason for high rates is that these are unsecured loans. By the way, these days it’s very easy to get pre-approved personal loan offers for quick approval. I am sure you are constantly bombarded with such offers from all directions. These days (for those who are living paycheque-to-paycheque) there is this concept of payday loans like Planet-loans.com catching up too. But generally the among available via such loans may not necessarily be enough for making home downpayment.
For Rs 4 lac personal loan and assuming a 12% personal loan rate, different loan tenures will have different EMIs as follows:
- 5-year loan – Monthly EMI of Rs 8-9000
- 4-year loan – Monthly EMI of Rs 10-11,000
- 3-year loan – Monthly EMI of Rs 13-14,000
- 2-year loan – Monthly EMI of Rs 18-19,000
- 1-year loan – Monthly EMI of Rs 35-36,000
Now you know the limitation that lenders have on you.
That is, the sum of your home loan EMI + personal loan EMI cannot exceed Rs 40,000 per month.
So under these constraints, the combination that works initially is taking a 25-year home loan (EMI Rs 30-31,000) and a 5-year personal loan (EMI Rs 8-9000). The total EMI outgo will be about Rs 40,000 per month.
So that is the Home loan plus Personal loan EMI calculation.
At this point, I should mention this that if you take two loans which form 40% of your monthly expenses (via EMI servicing), then you will be at the absolute limit of your borrowing capacity. And if in case of an emergency you need to borrow more, you will be unable to do it. So keep that point in mind.
So in the example we took, this is how things will look like:
- You can purchase a house of Rs 50 lac.
- You will get a home loan of Rs 40 lac only (80% of the cost)
- The remaining 20% or Rs 10 lac is to be provided by you.
- You have savings of Rs 6 lac only.
- You need to take a personal loan of Rs 4 lac to achieve the targeted downpayment amount.
- The lenders will only give you loans till the time your monthly EMIs are less than 40% of your monthly income.
- Since your monthly income is Rs 1 lac, the total of all your EMIs cannot exceed Rs 40,000 per month.
- You can take a 25-year home loan (EMI Rs 30-31,000) and 5-year personal loan (EMI Rs 8-9000). The total EMI outgo will be about Rs 40,000 per month.
- Once the personal loan EMI is over after 5 years, you can increase your home loan EMI to reduce home loan tenure and save tons of money on interest paid.
Once you avail two loans, then obviously you will have to service two EMIs regularly. So you have to prepare yourself and your family to manage your monthly cashflows accordingly.
I would suggest one thing here for those looking to take a personal loan for downpayment. Have a relook at your existing assets. It’s possible that leaving aside the Emergency Fund (assuming you have it), you may have certain other financial instruments purchased randomly here and there and which are not suitable for you. You can exit/surrender such products and increase your downpayment amount and reduce the personal loan requirement. But whatever you do, do not dip into your retirement savings or investments for children’s higher education.
So that’s it about the topic.
If you are considering taking a personal loan to make a downpayment for a property purchase, then do keep the points discussed above in mind. Taking a personal loan in addition to a home loan will naturally strain your finances as you will be servicing 2 EMIs.
I would recommend taking a personal loan for downpayment as a last resort and only when you have no other option left.