What is the best approach to managing home purchase without straining finances?

I'm in my early 30s, married with a young child, and working in an IT company for 10 years. I've saved in mutual funds, fixed deposits, PPF, and stocks. We currently live in a rented apartment, but I’ve found a property that fits our budget. The house costs ₹85 lakhs, requiring a ₹25 lakh down payment and a ₹60 lakh loan.

I’m unsure whether to break my investments to reduce the loan amount or take a loan for the entire amount and keep my investments intact. I want to ensure that whichever option I choose doesn’t negatively impact my long-term financial goals, such as my child’s education and retirement. What would be the best approach to manage this home purchase without straining my finances?

- Name withheld on request

This is a very classic question received from home buyers. Before we suggest the most preferred approach, let us outline some of the key assumptions and data points considered.

We have considered the loan repayment tenure of 20 years and a fixed home loan interest rate of 8.75%. Ideally, it is suggested to go for a floating interest rate given the current interest rate cycle in India. The growth rate of different asset classes are as follows : 

• Mutual funds and Direct Stocks - 12% 
• PPF and FDs - 7.1% 
• Primary Property (new house) - 5%

We have considered two alternatives in principle:

(i) To go for maximum self-funding possible, that is, ₹50 lakh down payment, by utilizing the existing investments fully, except PPF: The loan amount will be ₹35 lakh with an EMI of ₹30,000. At the end of 20 years, the total wealth generated will amount to Rs.6.68 crore, considering the surplus cash flows being invested in asset classes generating 12% return.

(ii) To go for 30% down payment and 70% loan as mentioned in the query: Arranging ₹25 lakh from FD ( ₹5 lakh), direct stocks ( ₹5 lakh) and MF ( ₹15 lakh) and loan amounting to ₹60 lakh, EMI ₹53,000. At the end of 20 years, total wealth generated will be amounting to ₹6.89 crore, considering the surplus cash flows being invested in asset classes generating 12% return.

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There is no significant difference in the expected total financial assets after 20 years in either alternative if we assume a 12% return on investment. But if the return on investment is increased to 15% or so, the networth at the end will be higher, which means higher risk. Thus, the call completely depends on your risk appetite. If you are ready to bear more risk and earn more returns, it is suggested that you leverage more (opt for a higher loan amount) than utilizing the existing investments.

The calculations are purely based on the given scenarios and it is not standard advice for all house buyers.

Nehal Mota is co-founder& CEO of Finnovate Financial Services