Down payment is the initial upfront portion of the total amount due that is to be given by you to the builder/seller of property. This sum acts as a ‘token money’, which certifies your serious intention to purchase the property.

Generally, the down payment ranges between 10 and 30 per cent of the property value, depending on the property type, condition and your lender.

Though the down payment forms a small proportion of the total price of the property, prudent planning is required so that sufficient funds are available for making this lump sum payment. In case you do not have ample liquidity to make your down payment, there are various options that you can consider to fund this payment…

Some of the options that you can consider are:

Temporary help from relatives/friends.

Taking temporary help from your relatives/friends is one of the easiest options available to you. This option saves you from using your investments to generate short term liquidity and you may be able to avail of this financial help, without any cost (read interest). This financial assistance can be repaid from immediate future earnings. Since after the approval of the loan, there would be a time lag of 3-4 months before you are required to start making repayments, you can repay your friends/relatives during this time.

Taking assistance from relatives/friends is a better option as compared with breaking your fixed deposits or paying premature penalties on redeeming your long term investments or liquidating your equity portfolio in haste.

Arrange loan on investments

You can also consider taking a loan against your investments. This will not only help you keep your investments intact but you can also arrange funds for your down payment. Before undertaking a loan on your investments, there are a certain things that you need to consider:

1. You would need to select an appropriate lender who can provide you a loan against your portfolio. Study the terms and conditions of this loan carefully specially with regards to the investments (such as bonds, stocks, etc.) eligible for loan, rate of interest, processing fees and period and prepayment charges.

   If you are opting for a loan against your equity investments, you need to check the margin amount which is to be maintained on your investments. Usually, lenders maintain a fixed percentage margin on the stock value before disbursing the loan. For instance, suppose the market value of your equity investments is Rs 1 lakh and the lender keeps a margin of 20 per cent on the market value of the investment, you will be eligible for a loan amount of Rs 80,000. The market value of your investment keeps changing, however the margin percentage needs to be maintained at all times. So if the value of your equity investment falls to say 90,000, your loan eligibility also declines to Rs 72,000. If you have taken a loan of Rs 80,000, you will need to pay back the excess of Rs 8000 to the lender. A failure to do so will attract penalties, which may be in the form of additional interest or sale of stocks in some cases. You need to consider the clauses with respect to default in this payment before liquidating your investment.

2. When you take a loan against bonds or fixed deposits, you should consider the impact that the loss of interest on these investments will have on your income stream. This is because once you use these investments as collateral for a loan, the interest earned on these investments is credited to the lender’s account. This interest forms the part of repayment of your loan.

   You also need to consider the interest and processing charges payable for the loan. By taking a loan instead of liquidating investments prematurely, you do save on the penalties applicable. Ensure that your savings on account of non-payment of penalty charges are more than the costs incurred on the interest and processing charges payable on loan.

Liquidate investments

If both the above options are not workable, you can consider liquidating your investment portfolio. However, it is essential to identify which investment to sell off. You would need to identify the potential of each of investment before arriving at this decision. For instance, you may have an investment which has already given you high returns and the prospects for further growth are limited. It would be wise to liquidate this investment. On the other hand, there may be an investment which has not performed well in the past but market conditions or sector prospects are positive and it may yield better returns in the future. You would be well-advised to keep this investment intact. There also may be certain investments which have neither yielded expected returns nor have any growth potential. You may liquidate these investments as well. Utilise the services of your investment advisor / financial planner to help you identify the appropriate investments to liquidate. This will ensure that even though you are forced to liquidate part/whole of your portfolio in absence of other options to raise funds, you make the most of these investments. This will also ensure that your overall net-worth is not impacted since you are shifting your funds from one investment form (current) to another (home/property).