Want To Buy A House In 5 Years? These Investments Could Help Accumulate Down Payment

Realising the dream of owning a house requires careful financial planning, especially in the current real estate market. India’s real estate market has been on the rise, which means that homeowners have to pay a premium for their purchases due to the rising demand. 

People who are determined to become homeowners can explore certain strategic investment options to save for the down payment, reducing their home loan burden.

The first step towards buying a house is understanding your needs and purchasing power. It is recommended to obey a general financial discipline of the 50-20-30 rule which stresses allocating 50% of the income to needs, 30% to wants, and 20% to savings and debt repayment. Individuals looking to secure their home loans should start saving for it at least 5 years in advance to ensure a smoother, stress-free process, as it will be a long-term commitment. 

Some might have to opt for significant lifestyle changes and even tweak the ‘50-30-20’ rule in favour of more savings to meet their goals.

While deciding on the home loan value, one may turn to the ‘20-30-40’ rule, which looks at various aspects of home loan and personal risk appetite.

Financial experts recommend having at least 30% of house value as a down payment. However, one may even take this further to 40% to relieve oneself of long-term financial stress through loan EMIs.

The ‘20-30-40’ rule suggests that the loan principal must not cost more than 3x one’s “in-hand” annual family income. The 20 suggests that the loan period should not be more than 20 years. The ‘30’ suggests that all EMIs must be less than 30% of one’s take-home income. The final 40 part is meant to suggest that the down payment must at least be 40% of the cost of the house.

Based on the above rule, someone with a Rs 10 LPA income (in hand), should avoid opting for a loan principal exceeding Rs 30 lakh. Their EMI comes to around Rs 3 LPA for 8.5% interest for 20 years. But this is not a set rule and only a recommendation to avoid a stressful loan repayment.

In India, lenders typically provide 60% of property value as a loan. Certain lenders require the loan amount not to be more than 60% of the total eligible loan amount a person can secure. To be clear, these are not universal rules and may vary depending on the lender.

This means that someone with a 10 LPA salary could be eligible for a loan of around Rs 50 lakh. If they are seeking a property priced around Rs 75 lakh, and want to take a maximum loan amount of Rs 50 lakh, they will need to accumulate about Rs 25-30 lakh for down payment.

With a time frame of only 5 years, it is essential to look at investment options that can offer higher returns but are also safe, given the shorter investment horizon.

If one is considering mutual fund investment to secure a down payment, it is important to consider the risks. While equity funds may seem lucrative due to their traditional potential for higher returns, some experts suggest opting for debt mutual funds instead as they are relatively safer.

A debt mutual fund with a 5-year annualised return rate of at least 13% can help accumulate the down payment value in 5 years with relatively lower risks. This means that a monthly SIP of Rs 30,500 in this fund would result in an accumulation of Rs 25,35,674 over 5 years. This amount is in line with the required down payment threshold in the given example.

Another option to consider for down payment savings is investments such as Gold. In 2023, the yellow metal gave an annual return of 13.1%. Last year, it gave a strong 26% return to investors. Hence, holding onto your gold investment may also be a good option, depending on your personal goals.