How to Save for Down payment? - Tips to Buy your Dream Home

Buying a home is every earning person’s dream.

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But saving money to buy a house isn’t as easy as it sounds, it needs prior planning years in advance. If you are uncertain about how much money you should spend to buy a house. It’s generally recommended that you consider five times of your annual salary as the home’s total cost.

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In this article, we will walk you through some tips that will help you quickly save money for a down payment and make your dream of owning a home come true.

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Effective Tips for Saving Money for Your House Down Payment

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Before you start saving money for a house, you should understand what is a downpayment. A down payment is an initial, upfront payment made when purchasing high-priced items. The remaining amount is financed through a loan, which the buyer repays over time with interest. 

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In India, the cost of real estate has soared 4% YoY (year-on-year) from January-March 2022. In metro cities like Bangalore, Mumbai, and Delhi, the average realty price is between ₹7,363-₹19,557 per sq ft. 

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Hence, people naturally gravitate toward home loans, and arranging the down payment is not a child’s feat. 

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Banks prefer lending money to aspiring homeowners who can put in at least 20% of the property’s appraised value. 

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Here are a few tips you can consider to save money for your house downpayment:- 

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Build a Budget and Stick to It

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Creating a well-planned budget is crucial to saving money for a house. By analysing your income and expenses and understanding your needs and wants, you can design a realistic budget that helps you put aside sufficient funds while maintaining a comfortable lifestyle.

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 Follow these steps to create an effective budget for saving for your house:

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Track Your Income and Expenses: Start by recording your monthly income and listing all your expenses, including both essential and non-essential items. There are multiple personal finance apps available in India. This will help you understand your spending habits and identify areas where you can cut back.

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Set Savings Goals: Determine the amount needed for your down payment and set a target date for achieving this goal. As mentioned earlier, you should consider five times your annual salary as the home’s total cost, so that you don’t struggle to put 20% of the total value of your house as the downpayment. 

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Allocate Your Income: Based on your spending analysis, allocate a percentage of your income to each expense category. If you are not sure about how to allocate income around different expense categories, following the 50-30-20 rule can be a good idea. 

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50-30-20 rule emphasises on allocating 50% of your income to necessities, 30% on discretionary expenses such as entertainment, dining-out, and the remaining 20% for savings.

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Make Lifestyle Changes

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Saving money for a house down payment often requires major shifts in your lifestyle.

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By making conscious decisions to reduce expenses, you can accumulate the funds needed for your dream home more quickly. Consider the following lifestyle changes:
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• Move to a Cheaper Apartment
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Relocating to a smaller or less expensive home can save you a significant amount of money.

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This reduction in rent or mortgage payments can be redirected towards your down payment savings.
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• Cut Unnecessary Spending
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As your salary increases, your cost of living may also change, leading to a preference for finer things and luxurious amenities.

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However, prioritizing saving for a house may require cutting back on non-essential expenses. Spend less on vacations, entertainment, and memberships to free up funds for your down payment.

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Look for passive income avenues

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In addition to cutting back on expenses and making lifestyle changes, another strategy to accelerate your down payment savings is by exploring passive income opportunities. Passive income can supplement your primary salary, providing you with additional funds to save for your dream home.

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Consider starting a side hustle to generate extra income. Side hustles can range from freelance work and consulting services to selling handmade products online. Choose a side hustle that aligns with your skills, interests, and available time.

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Dividend-paying stocks can provide you with a steady stream of income without requiring active involvement. By investing in companies with a strong track record of paying dividends, you can grow your down-payment fund over time.

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The combination of disciplined spending, lifestyle adjustments, and additional income sources will put you on the fast track to homeownership.

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Get Your Debt Under Control 

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When planning on how to save for a down payment, it's essential to manage your existing debt. It is advised that a person should not spend more than 35-40% of their income on repaying debts. If you have existing debt, it becomes difficult to set aside money for a down payment.

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Maintaining a credit score of 750 or higher is crucial because it establishes your high creditworthiness and can help you get home loan approval. Remember that your credit score is affected by the amount of debt you owe. Hence, unpaid debt will lower your credit score, making it difficult for you to seek a loan.

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If you're in debt, it's advisable to postpone your plan to buy your dream house. Adding a home loan to your existing debt will likely worsen your financial condition. You should take one step at a time and clear a significant chunk of your existing debts before taking another loan

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Start Investing
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One of the most effective ways to save money for your house down payment is by investing your savings. Depending on how early you start saving and the duration of your savings plan, you can explore various investment options to grow your down payment fund. It's generally advised to start saving 4-6 years before you plan to purchase your home. 

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Opening a savings account is a common option for people who start saving for a house. However, the return offered on a traditional savings account is relatively low. If you're looking for a more profitable option you can try looking for some investment options like mutual funds, debt instruments, government bonds, etc.

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A recurring deposit is a low-risk investment option that allows you to deposit a fixed amount of money every month over a predetermined period. RDs typically offer higher interest rates than regular savings accounts, making them an attractive choice for long-term savings.

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Based on your risk tolerance you can also consider investing in mutual funds as they might give you better results than a regular savings account. The best way to invest in mutual funds could be to invest in Systematic Investment Plans (SIPs). SIPs allow you to invest a fixed amount regularly in mutual funds, helping you build wealth over time while instilling financial discipline

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By starting early and choosing the right investment options based on your risk tolerance and savings duration, you can accelerate your savings for your house down payment. 

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It's important to consult a qualified financial advisor or professional who can provide personalized guidance for your specific circumstances.

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‍Monetize Your Assets

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If you still fall short on funds after saving for your new home’s down payment, consider monetizing your other assets like bank FDs or your life insurance policy.

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‍You can break your FDs or take loans against them. Based on your FD deposit amount, you can borrow 90-95% of the money. Similarly, you can borrow 80-90% of the surrender value from your life insurance. But the only stipulation is that you pay it back with interest. It is called an overdraft. 

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‍In case of an overdraft from FD, the interest you have to pay is 1% more than the interest rate the bank was paying you. For a loan against a life insurance policy, the interest rate starts from 10%. Despite the high-interest rate, they disburse the borrowed money within 72 hrs of approval.

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‍Alternatively, you can withdraw a portion of your employee’s provident fund. You do not have to pay it back. If you take this road, you will lose a major chunk of your retirement money.

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‍Avoid taking personal loans or using credit cards, as they only increase your debt burden.

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Final Words

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Based on the property you choose, your down-payment amount could be some thousands or even lakhs of rupees. So, while choosing your new home, try to think practically. Your home should also meet all your needs and favours your financial state.

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On the other hand, your home’s monthly EMI should not be more than 35-40% of your take-home salary. This way, not only will you be able to do your savings and make your essential expenses, but you will also fulfil your dream of owning a home.

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Throughout the process of saving for a down payment and purchasing a home, it's wise to seek the guidance of a qualified financial advisor or professional. They can offer personalized guidance on investing your savings, helping you assess your financial goals and navigate the local housing market effectively.

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Stay committed to your financial plan, by creating and sticking to a budget, making lifestyle changes, exploring passive income avenues, and implementing proper investing strategies you can make your dreams of getting the perfect home come true.

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