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Loan down payment - How to arrange money that?

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WITH the Reserve Bank of India (RBI) imposing restrictions on the quantum of loan that banks can extend to home-loan seekers, arranging for the down payment has grown into a bigger concern for house hunters. Recently, RBI issued a directive saying that the loan-to-value (LTV) ratio for housing loans is not supposed to exceed 80%. For small-ticket loans – i.e. housing loans up to 20 lakh – however, it can go up to 90%. What this essentially means is that if you have finalised a house for say 10 lakh, the bank may sanction a loan of 9 lakh. However, if your transaction is valued at 1 crore, no bank will extend a loan of more than 80 lakh.


    As a customer, this means that your down payment requirements go up. The ideal approach for arranging for the amount, of course, is to save and invest towards the goal when it is three to four years away. If you have not followed the discipline, however, you can tap into other avenues to make good the shortfall. To this end, you should look at monetising your liquid assets like fixed deposits or other short-term investments first. You can borrow against these instruments, if it is difficult to liquidate them. Your long-term investments should be tapped only as the last resort. It is best to avoid personal loans and credit cards entirely in this case, given the exorbitant interest rate they carry. Even short-term financial crunch could result in a huge debt burden, leaving you struggling to service both home loan and the personal loan.


    You can explore the option of borrowing against your life insurance policies, jewellery, fixed deposits, mutual funds, stocks or even your retirement-oriented investments including public provident fund (PPF) and employees' provident fund (EPF). Partial withdrawal can also be considered in case of the latter. PF withdrawals will attract tax if made within five years of continuous employment, unless the purpose is purchase of a house or funding your daughter's wedding.


    The most convenient option could be borrowing against your life insurance policy, especially if the life insurer extends the amount. This is because you can benefit in terms of lower interest rate and an easy repayment schedule. However, note that the loan is not available in case of term insurance policies and those that have not acquired a surrender value. Also, not all insurers extend this loan against Ulips (unit-linked insurance plan). Depending on the insurer, you can borrow up to 85-90% of the surrender value. Interest rate could range from 9-9.5%, to be paid half-yearly. Alternatively, you can allow the loan amount to be deducted at maturity. In the event of the policyholder's demise, the benefits will be paid out to your dependents after settling the outstanding loan amount.

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