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How to Buy Your Dream Home Without Any Savings: A Step-by-Step Guide

Posted on 30 Sep 2023
Author: Sayan Sircar

Tags: House Purchase ; Step by step

11 mins read
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This article shows how sufficient cash flow is the key to purchasing a house, even if you are yet to save for the down payment.

How to Buy Your Dream Home Without Any Savings: A Step-by-Step Guide

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What do you need to purchase a house?

To buy a house, you need two things:

money saved for a down payment
the ability to take (based on current income) and pay off (based on future income) a home loan

Given that Indian banks generally insist on a 75% loan to value (LTV), i.e. sanction no more than 75% of the cost of a house, it is essential to have a substantial down payment amount. We have written on this topic here: SMART goals: investing step-by-step for buying your dream home.

Note: Other companies like NBFCs may offer higher LTVs, but their loan rates are higher.

However, there are multiple reasons why saving for a down payment may not be possible:

you did not initially want to buy a house but have recently changed your mind
your income has recently increased
house prices are increasing, and you are concerned that you will not be able to buy a house of your requirements (size, location and amenities)
investing money for a short-term goal like a house down payment will require you to invest in safer options (RD, debt mutual funds) where the return will be low

What is the solution in that case?

Let us be clear on one point: if you do not have the down payment ready, you can:

borrow from family or friends
sell assets like equity mutual funds: Should you sell your mutual funds to buy a house?
borrow against assets like gold or take a personal loan

Each option above has a high interest rate on borrowing or a high opportunity cost when you sell high-growth assets like equity.

We will now formulate a plan that considers all these considerations with two main caveats. We will:

Purchase under-construction property from a well-regarded premium builder
Go for a construction-linked payment plan to spread out your payments
Take an interest moratorium on the home loan until registration

Note: We are not advocating apartments vs. low rise units like a bungalow or builder floors. The same concept is freely applicable regardless of unit purchased.

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Explaining the choices made above

Purchase an under-construction property

A sample payment plan:

Sample Payment Plan

Instead of saving for the down payment in a low-return FD, you can pay periodically to the builder for your new home as the construction progresses.

Under-construction properties lock in the price once purchased and do not increase while the down payment is saved. This plan takes care of FOMO (Fear of Missing Out) in a rising market and the risk of price appreciation while you are accumulating the down payment.

What happens if you instead start a SIP in an equity mutual fund to save the down payment?

Equities are volatile in the short run. If the stock market falls when you plan to buy the house, you must either buy a smaller house or postpone the purchase.

The builder is well-regarded for timely deliveries

We need to check for these things for the builder who is offering the property:

reputation in the market for timely deliveries
active RERA registration for the respective state
no active court cases or disputes regarding the promoters or executives
the builder should be preferably listed on the stock exchange to promote complete transparency on financials

Such properties will be predictably more expensive than those without all these checks being true.

Moratorium on the home loan

When you apply for a home loan, you ask for a 48-month moratorium covering the entire construction period. During the moratorium period:

you pay only the interest on the amount disbursed so far
payment of the interest ensures that the interest does not get added to the loan principal, which would increase the EMI

EMI payment for the loan starts once the moratorium is over.

Caveats regarding this plan

There is enough income to approve the loan

EMI of ₹1 lakh requires a monthly income of ₹2.5-3.3 lakhs (30%-40% limit)

Banks generally do not allow more than 30-40% of the monthly income as EMI while sanctioning a loan. This limit restricts the amount of loan your will get and therefore the house you can buy. Of course, it is easier to reach such income levels as a dual income family so that you purchase the house (and then apply for loan) jointly: Home Loan Eligibility for Joint Applicants: how to buy a bigger house

There is adequate cash flow for the next 10-15 years

Buying a home is a long-term commitment that requires the family income to be at a particular level and not fall below that due to illnesses, job losses or career breaks.Couples should carefully plan around any career breaks due to maternity.

The construction could be delayed

The home loan EMI payments will start as soon as the moratorium period is over. Construction delays might occur due to multiple reasons which are unpredictable.

We have covered these topics in detail here: How does your risk profile change with a home loan?

Worked out example

Step 1: Find a house to buy

In this example, we will show how to purchase a house as long as you can spend just 1% of the cost of the house in a month and increase that spending amount by a modest 5% yearly. The entire house will be yours in 9 years: 4 years in construction and the home loan paid off in 5 more years.

Month	Payment plan
1	10%
2	10%
12	10%
30	30%
42	10%
48	30%
49	15%

The last 15% is the cost of registration, etc. The loan EMI starts this month. We will assume:

Cost of the house: ₹1 crore
Other costs like registration, MODT (home loan charges), shifting and interiors: 15% (i.e. ₹15 lakhs)
Home loan disbursed: ₹75 lakhs at 9% for 15 years (EMI = ₹75,000/month)
the payment plan is as per the above table
It takes 6 months to locate the right house to buy. This time is also used to save the initial amount to be paid to the builder as well as for the loan approval

Step 2: Start a fund to invest for the builder payments and loan interest

Once you decide to buy a house, the 6-month timer starts, and you immediately start a SIP of ₹1 lakh a month in a money-market or arbitrage debt mutual fund:

Debt MF returns a modest 4% after-tax
the SIP amount is increased by 5% yearly (₹12 lakhs saved in year 1, ₹12.6 lakhs in year 2, etc.) as a step-up SIP

Payments before possession

This SIP continues until the property registration happens and the entire dues to the builder are paid off. The purpose of the SIP is to accumulate a corpus to:

pay the initial 10% as per the payment plan
pay the builder as per payment milestones
pay the costs for registration, MODT, shifting and interiors
pay the monthly interest on the loan (your SIP in the debt MF is adjusted against this payment so that you don’t buy and sell MF units every month)

For each payment made to the builder:

25% comes from your debt fund corpus, and 75% from the loan
you pay the required TDS amount: TDS on Property Purchase: A Step-by-Step Guide.

Step 3: Spend the extra money in the fund once construction is over

If all goes well, you will have some money left over in the fund for:

registration, MODT, shifting and interiors (this is as per plan)
loan prepayment: you can either use this money to immediately prepay the loan or keep the amount as a home loan EMI buffer fund

As per the plan, you are now at the end of month 54:

6 months for house search
48 months for construction

Home registration, interiors and shifting will now happen. The loan EMI will also start.

Step 4: Pay off the home loan

Year	Amount spent/month
1	₹ 1,00,000
2	₹ 1,05,035 (+5% over last year)
3	₹ 1,10,324 (+5%)
4	₹ 1,15,878 (+5%)

After spending ₹1 lakh/month for 54 months and increasing the amount by 5% a year, you are now spending ₹1.15 lakhs/month. The loan EMI, assuming no rate changes, is ₹75,000/month: How much EMI do I have to pay for my home loan?.

You can, therefore, prepay the loan by at least ₹40,000/month. Since you are used to it, we will also increase the EMI by 5% a year.

Year	EMI	Starting Loan balance	Ending Loan balance
5	₹ 1,21,713	₹ 61,90,160	₹ 52,02,951
6	₹ 1,27,841 (+5% over last year)	₹ 52,02,951	₹ 40,47,582
7	₹ 1,34,278	₹ 40,47,582	₹ 27,04,784
8	₹ 1,41,039	₹ 27,04,784	₹ 11,53,331
9	₹ 1,48,140	₹ 11,53,331	₹ 0

Home Loan Paid off in five years

The chart shows that your loan will be paid off in less than 5 years. The house will be yours as per this plan:

you save 1%/month, increasing the amount by 5% a year
you spend 6 months searching for the house
the house was constructed in 4 years
the loan is paid off in 54 months

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