Purchasing a home is a significant milestone in everyone’s life, especially if it is your first home. There are financial and emotional choices to be made in the journey and you're undoubtedly prepared to make the leap even when you have a reliable source of income and feel ready to deepen your roots. Just as there isn't a single ideal home for everyone, there isn't a single ideal way to finance a home purchase.
When it comes to buying a house, the idea of taking a home loan is the most obvious and popular choice. It’s no surprise since it happens to be the most commonly advertised by everyone - from your family & friends to the banks that sell the home loan.
But given the current interest rate environment, high prices, and recession fears, many potential homebuyers find themselves priced out of typical home finance. The home loan rates have increased substantially in the last few months moving from an all-time low of 6.5% in 2022 to almost 9% in 2023.
Alternate ways to finance a house
Taking a home loan is a long-term commitment, considering most people take a loan for anywhere between 15 to 20 years. Since most of us may not even know what we may be doing in that period and that poses its own risk. But what could be some innovative ways in which we can reduce the home loan amount so we lower both the costs and the risks associated with it?
Here are some creative ways for you to finance your house that you could consider, especially if you find yourself on the road to better career or business prospects.
A loan from private lenders
A loan from private lenders is the kind of loan people often consider when they have low credit scores which prevents them from qualifying for a traditional home loan. Loans from private lenders work just like any other loans from banks or credit unions and they are not associated with any banks. They can work as either individuals or as private lending companies.
Private lenders are typically less risk-averse than banks. As a result of the higher risk of lending to you, they will charge you a higher interest rate than a conventional lender (such as a bank).
Private lenders may also ask for some security in the form of a promissory note or a mortgage agreement. This makes borrowing very risky and expensive.
A loan from family & friends
Borrowing from a family member or friend who has the financial means to do so is a good alternative; this practice is known as peer-to-peer lending. Borrowing from family & friends is a good choice if you are in a position where a family member or friend of yours is prepared to loan you the money, and you are confident that you can repay the loan within a promised stipulated time.
A peer-to-peer home loan can be financially beneficial for both of you if you can negotiate for more flexible payment terms at a reasonable interest rate. You have the option to ask for a lesser interest rate than the bank and if the family or friends are trying to help you out, they could earn more interest rate than a standard fixed deposit and yet have the pleasure of helping someone they care about. For you, this could mean lowering your EMIs significantly.
Government schemes for home buying
There are many housing schemes run by the Governments that help in the home-buying process and the majority of these are regulated by the State and Central Government authorities. All these schemes work towards fulfilling the dream of owning a house for middle and lower-income groups of India irrespective of the class or group they belong to. A housing scheme saves you money on expensive real estate acquisitions and gives you a home for less than the going rate. Also, many housing programs backed by both governments are low-risk and come with low or even no down payment requirements.
Here are some of the popular government-backed housing schemes
- Pradhan Mantri Avas Yojana (PMAY)
Pradhan Mantri Awas Yojana aims to provide housing for all by 2022 and it is initiated to make house ownership an affordable reality for the economically weaker sections (EWS) of the society. It offers an interest subsidy of 2.67 lakhs on home loans for first-time homebuyers. This scheme works differently for rural areas and urban areas.
Any household with an annual income ranging from INR 3 lakh to 18 lakhs may apply for the PMAY scheme. In no part of the country should the applicant or other family member have a pucca house. The scheme does not offer an interest subsidy for a previously constructed building.
- Telangana housing scheme
To assist people in building homes on their own properties, the Telangana government has recently developed a brand-new program. Now, the Government would provide financial aid worth Rs. 3 lakhs per house. This program is available to those who have their own land and a white ration card. The chosen individuals would receive a total of Rs. 3 lakhs in installments under this program and the recipients will be only determined by the Tehsildar and MPDO, after which the applications will be submitted for the Collectors' approval.
Loans against assets
There are other alternative financing options such as personal loans, gold loans, and shares that carry more risk than a home loan. And the interest rates for these alternative financing options are typically higher than those for home loans. Below mentioned are some of the loan options available to get a loan and finance your house. It is important to carefully consider all of these options and determine which one is best for your financial situation.
- Fixed Deposits (FD): Fixed Deposits are a type of savings account where the depositor can earn a fixed rate of interest over a specific period of time. Getting an overdraft on your fixed deposit funds can be a great way to leverage your savings for a low cost while retaining your savings.
- Life Insurance Policies: Some life insurance policies offer a loan facility, where the policyholder can borrow against the policy's death benefit. Loan against the policy is given by both banks and insurance companies, however, not all policies are eligible for a loan.
- Mutual Funds: Many financial institutions also give you a loan against mutual funds. This is a great way to leverage your market linked instruments for buying an asset.
- Employee Provident Fund (EPF): The Employee Provident Fund is a retirement savings plan for employees in India. If you are an employee for many years and have sufficient EPF funds, you can now withdraw the lump sum to finance the purchase of your home.
- National Savings Certificate (NSC): The National Savings Certificate is a fixed-income investment option offered by the government of India. The funds can be used to finance a home purchase.
- Gold Loan: A gold loan is a loan that is secured against the value of gold. You need to pledge your gold holding, which may be sold off by the lender if the loan is not repaid on schedule. Gold loans have typically lower interest rates than other sources.
- Share Market: Shares in publicly traded companies can be bought and sold on stock exchanges and the profits from these investments can be used to finance a home purchase.
There are some other alternatives for buying a house without a house loan such as crowdfunding seller financing, rent-to-own, a house with shared equity, and buying an auction house. While these are not great alternatives to consider, they are still an option for you to explore.
There is no ideal way to finance or purchase a house. Yes, the majority of individuals use house loans to purchase their homes, but this does not imply that this is the only option. Since every person's situation is unique, you must seize the chances that are presented to you.
If you are looking for a 2.5 BHK or 3 BHK home in one of the fastest-growing areas of central Hyderabad, you could explore the Ambience Courtyard. Our sales advisors are there to help you understand the different financing options available and help you navigate the complexities of a home purchase.