Things to consider before using a personal loan for home loan down payment

The easy availability of ready homes and home loans have made property purchases more affordable. Banks issue only up to 80% of the property value as home loan and the remaining 10%, plus additional expenses involved in the transaction have to be borne by the buyer. However, if you do not have enough funds saved, you will may need to consider other options for making this down payment.

At this point, a buyer often considers applying for a personal loan, rather than waiting for another few years to save money for the down payment, because they are either desperate to have a home of their own (the Coronavirus-induced lockdown may prompt more people to consider buying a home of their own) or to avoid paying huge amounts as rent.

While personal loans provide you with instant liquidity, because banks are quick to disburse these, a borrower must be mindful of the inner workings of this product and how its purchase would impact his future financial position.

Personal loan interest rates

As personal loans are unsecured loans (banks provide these loans based on your face value, with no collateral), the interest on it is much higher, as compared to home loans. Currently, a buyer can avail of housing loans in India in the range of 9%-11% interest. On the other hand, personal loan interest rates currently range between 11% and 24%.  This would significantly increase the cost of buying your property.

“Personal loans are only recommended, when the buyer has no other option. They can elevate the financial burden on buyers with its higher interest rates and shorter repayment tenure. Lower interest on personal loans are only possible, if one has a good credit score and stable income. So, maintain a good credit score, if a personal loan is your only option,” says a highly placed senior source in a leading Mumbai-based fintech, requesting anonymity.

Personal loan’s impact on credit score

A person’s creditworthiness is also impacted, if he opts for a personal loan to pay down payment for a home purchase. As you have leveraged a part of your creditworthiness and repayment capability, towards taking the personal loan, this will affect the amount of home loan that the bank would be willing to issue. Typically, not more than 40% of your monthly take-home salary should be used for EMI payments.

Personal loan plus home loan EMI calculation

Suppose that you have selected a house worth Rs 50 lakh. The bank is willing to give you a housing loan of Rs 45 lakh (90% of the property value), because of your good credit score and you have dutifully have repaid all your past credit card loans. The bank is also willing to make an exception for you, because you are an old customer.

The EMI for a 20-year tenure, at an interest rate of 8%, works out to Rs 41,822.

You now need Rs 8 lakh, for the down payment and stamp duty and registration charges. For this, you take a personal loan.

For a five-year tenure at an interest rate of 11%, the EMI works out to Rs 17,394.

This means your total EMI outgo for a month would be Rs 59,216.

For a lender to approve these two loans with a combined EMI of Rs 59,216, your monthly income should be about Rs 1.48 lakh (the sum of all your EMIs cannot exceed 40% of your net monthly income).

At this point it is pertinent to note that the two loans would absolutely limit your borrowing capacity. In case of any dire need, you may not be able to avail of any other loan.

See also: IFSC code Canara Bank 

Tax benefits on personal loans

The Income Tax (IT) Act allows tax deductions on personal loans for some purposes, including home renovation or purchase. Under Section 24 (b) of the income tax law in India, buyers can avail of deductions on the interest paid towards personal loans, if the money is being used to make the down payment for a house purchase. The amount of rebate in a year is restricted to Rs 2 lakhs, if the property is self-occupied. This is applicable even when you are using this money to renovate your property. However, if the property is rented, the entire interest amount could be claimed as deduction.

See also: All about home loan tax benefits

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