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It is never too early to begin saving for downpayment on a new house. Representative Image (Pixabay)

Saving up the 20% down payment required to purchase your dream home is always an arduous task. An individual should plan early to buy a house. Occasionally, it may make financial sense to live in a rented space because your money would be otherwise working hard, allowing compounding to work its magic. However, we have an emotional bond to our “own home,” which negates any financial logic or prudence. Here are some of the factors you should keep in mind while saving for your down payment.

Effect of your EMI on your down payment

The security you gain by having your own house will be fleeting if you do not factor in the effect of EMI on your monthly cash flow. This can result in more sleepless nights than you can think during the house-buying process.

Most people spend majority of their savings on the down payment on their homes. This typically comprises all liquid investments such as mutual funds, fixed deposits and recurring deposits.

While there is nothing wrong with selling these investments, the problem begins when you have no remaining financial assets, and the EMI payment prevents you from saving anything.

The primary difficulty is that the property becomes your single largest asset investment, which generates no return because you live in it. That being stated, both the down payment on the house and the EMI should be affordable.

Other costs should not be overlooked

One should keep in mind that registration and associated costs, such as stamp duties and, occasionally, brokerage fees if the house is purchased through a broker, are not included in the down payment. These charges are in addition to the down payment required by the homebuyer.

Begin early

It is never too early to begin saving for down payment on a new house. Your savings will also be determined by criteria such as your current pay, the amount of money available for monthly savings, and the property price.

As with any other objective, the down payment should be factored into their goal planning early on. However, if you purchase without planning, you risk jeopardising your long-term savings, which may have compounded in the future.

One can develop an early saving habit by investing in systematic investment plans (SIPs), mutual funds, or equity-linked savings programmes. That said, it is prudent to have a long-term savings strategy (of around 6-8 years).