Even when you plan to purchase a house through a loan, you still must make the down-payment from your own pocket. Your home loan wouldn’t fund the complete purchase amount. You must fund some percentage of the purchase from own pocket.
What if you didn’t plan well and you do not have funds to make the down-payment? Or you had to use the funds earmarked for down-payment in a family emergency? You have exhausted other options (hand loan from family, friends, liquid asset sale etc) too. What do you do in such a case? Should you simply put off the purchase?
Well, there is a workaround, if you are quite keen. You can take a personal loan to make that down-payment for the house purchase. In this post, let’s consider some of the issues with this approach.
You must understand that your home loan amount can be capped because of two reasons.
- Value of the Property: As per RBI guidelines, the loan to value (LTV) is capped between 75% and 90% of the property value. The caps vary depending on the quantum of the loan. For instance, if the value of the property is Rs 40 lacs, the bank will fund a maximum of Rs 32 lacs (80%). The remaining amount must come from your pocket.
- Repayment ability: This depends on your income, other fixed obligations etc. Banks, depending on their internal guidelines, are comfortable lending up to a certain percentage of your net income. For instance, if you net income is Rs 80,000 per month and the Fixed Obligations to Income ratio (FOIR) for the bank is 40%, the bank will give you a loan whose EMI is not more than Rs 32,000. For a loan tenure of 20 years and interest rate of 9% p.a., the maximum loan can be Rs 35.36 lacs. For more on this topic, refer to this post.
The maximum loan you can get will be the lower of the two numbers calculated above. If we club the facts of the two points, the maximum loan can be Rs 32 lacs. You need to manage the remaining funds.
- If the limitation is due to the LTV and your income can support a higher loan amount, you can opt for a personal loan to make the down-payment for the home loan. At least, the entire structure may be feasible.
- If the limitation is due to your repayment ability, then you have a problem. With your income level, you just about manage home loan EMI. How will you pay the personal loan EMI over and above it?
Personal loans are short term loans and carry a higher rate of interest, and therefore a high EMI. For instance, let’s say property value is Rs 40 lacs and the home loan sanction amount is Rs 32 lacs. You had Rs 3 lacs of own funds. You fund the remaining Rs 5 lacs through a personal loan at 10% p.a. for 3 years. The EMI will be Rs 16,133. A loan of Rs 32 lacs for 20 years at 9% will have an EMI of Rs 28,791. Adding the two EMIs, you have a monthly loan burden of ~ Rs 45,000. You need to see if you can support of EMI of Rs 45,000 with net monthly income of Rs 80,000. Not easy.
By the way, whether you will be able to get a loan of Rs 45,000 with an income of Rs 80,000 is a different question altogether. When you apply for a loan, the banks source your credit report to check about your other loan liabilities. Therefore, they are aware of your other loan obligations and consider those payments while offering you a fresh loan. It may not be easy to get 2 separate loans with combined EMIs of Rs 45,000. Still, since there is a lag in information sharing, you may be able to get through.
Personal loans are fixed interest loans. Home loans are floating. If the interest rates move up, your home loan EMI will also inch up. This will make managing the two EMIs even more difficult.
Points to Note
- You will get tax benefit on repayment of personal loan too (since you are using the amount to purchase a house). You will get tax benefit on interest payment up to Rs 2 lacs under Section 24. I am not sure if you will get the benefit for principal payment under Section 80C too.
- We must understand taking personal loan to make down-payment for the house defeats the entire purpose of caps on LTV (Loan to Value) imposed by the Reserve Bank. Personal loans are unsecured, and you can use the loan amount for any purpose.
What Should You Do?
You don’t purchase a house on impulse. You must have thought about it much in advance. You must start planning for that down-payment when this idea pops in your mind for the first time. Once you have an idea about how much your house is going to cost, you will also figure how much you need to put down. You can simply start saving some money for down-payment every month. You can put this money in liquid fund or bank fixed deposit or recurring deposit. If there is a shortfall, take out money earmarked towards some of your lower priority goals such as vacation etc. You can consider selling some of your liquid investments to bridge the gap.
A personal loan for home loan down-payment must be your last resort.