How to build a corpus to buy your first home?

In conversation with Amar Pandit, CFA, Founder, Happyness Factory. How to build corpus to buy your first home Buying a house is one goal that every individual has on their bucket list. It is one of the major financial decisions and involves a lot of planning and detailed budgeting. It carries a huge responsibility, in terms of making financial arrangements to fund this goal. One needs to understand their cash flow and their requirement to adequately finance this goal. However, we believe, if one takes the right financial decisions, they can easily build a corpus to fund their goal of buying a house. Firstly, one must decide on the timeline to buy their house and plan accordingly. Starting to plan as early as possible is advisable. If you start planning at the age of say 25, you would be able to save enough to buy a house in the next 7-10 years. However, one must be aware of the financial and investment options available to them to help them build this corpus. Of course, home loan eases some load off one's shoulders. But, one needs to plan for the down payment of the house, which again, is quite a substantial amount. Moreover, usually the maximum loan one can avail is up to 80% of the value of the property, i.e., you would need to plan for the remaining 20%. Ideally, you must choose to invest your money in instruments that will yield a higher rate of return than the current rate of inflation. For example, if you are planning to buy a house in the next 7 -8 years or more you must invest in Equity funds rather than Debt based instruments, this will help you yield higher returns and build a larger corpus over the years, with the benefit of compounding. For example, Mr. Rohan is 26 years old and wishes to buy a house in the next 10 years. Let's assume the cost of the house (as of today) is Rs. 1 Crore considering inflation of 7% p.a., the same house would cost around Rs. 1.97 Crore in 2029. If he avails a maximum loan of 80%, he would have to start planning to fund the remaining 20%, i.e., approx. Rs. 39 Lakh. To meet this goal, he needs to save and invest Rs. 17,000 every month (considering a 12% p.a. return). The idea is to start saving as much as possible and start as early as possible. You may start with a small SIP but increase it by 10%-20% every year. This will easily help you reach your desired corpus over the years. Secondly, once one has decided on taking a loan, they must estimate the amount of loan they can comfortably take so that they can pay off their EMI’s at ease. Banks usually charge interest of approx. 8.5% - 9.5% p.a. We recommend taking a higher loan over the long run, simply because we believe that the rate of return on your investments would be higher than the interest you are paying to the bank. Continuing with the above example, let us assume Mr. Rohan has availed a loan up to 80% of the value of his property, considering a rate of interest of 9.5% p.a., the approximate EMI per month would be as follows...

Loan Tenure	Rate of Interest	Approx. EMI*
10	9.5%	2.04 L
15	9.5%	1.64  L
20	9.5%	1.47 L

*Note: This is only an indicative figure for the purpose of planning. Early planning is the key to meet your goal. Start saving as early as possible and make sure you choose the right investment instrument, which can help you generate higher returns in the long run to reach your desired corpus.