Buying a home is a big decision. And, as with all big decisions, you need to be well prepared before you implement it.
For starters, before you decide on buying a home, make sure you have accumulated enough money to make the down payment. Hasty measures can put your financial security at risk.
Don’t dip into retirement savings
Rummaging through one’s retirement savings may seem the easiest option. But it is not the most desirable one, say experts. “Once you start chipping away at your retirement fund, there’s no stopping. You will start tapping it for all kinds of needs,” says Anil Rego, CEO, Right Horizons. With increasing life-spans, an adequate corpus to live out one’s retirement has become all the more important.
So, if you were thinking about dipping into your Employee Provident Fund (EPF) or the Public Provident Fund (PPF) to make the down payment on your house, think again. “The option to withdraw from the PPF is there to allow access to funds in case of an emergency. Arranging for the down payment on a house is not really an emergency,” says Vikash Agarwal, CFA and Co-founder, CAGRfunds. Bear in mind, the magic of compounding works best when you stay invested for the long term. So, it’s best not to touch one’s long-term investments.
Don’t withdraw from kids’ funds
You may feel tempted to take out money from your children’s education fund. Do not give into the temptation, say experts. “If you use part of the education corpus for any other purpose, then it’s almost certain you won’t attain your goal,” says Rego. Insufficient education corpus is likely to force you to opt for an education loan route and will strain your finances. “Servicing multiple loans (home and education loan) will stretch your finances and will put you at risk of default,” says Navin Chandani, Chief Business Development Officer, BankBazaar.
Avoid personal loans
Opting for a personal loan could burden you with back-breaking debt obligations, given that personal loans can be quite expensive. “Despite falling rates, personal loans can cost you 15-18% in interest,” points out Abhinav Angirish, CEO, Abchlor Investment Advisors. For a Rs 1-crore house, home loan of Rs 80 lakh at 9% for 20 years, will attract an EMI of Rs 71,978. A personal loan at 18% for five years, to pay for the initial Rs 20 lakh, will attract an EMI of Rs 30,866. The two EMI payments could lead to a lot of financial stress, and push your other goals by several years.
Don’t surrender insurance plans
Life insurance is meant to protect your family, when you are not around to take care of their needs. “Premature surrendering of insurance policies may solve your down-payment problem, but would endanger your family’s future security,” says Rego. A better option is to take a loan against insurance are expensive compared to loans by life insurance companies against such policies,” says Chandani.
Source: By Hiral Thanawala