The Role of Banking Deposits in Home Loans

Last Updated : Oct. 12, 2020, 7:26 p.m.

Small things, if done properly, help one accomplish big things in life. If we consider a home loan as the big thing, which actually is, small things would be the banking deposits that could enable the former. A home loan is big considering the expected large credit quantum and the long-term commitment, which can be for a maximum of 30 years. Ensuring a seamless approval of home loans will depend on your savings too. Yes, a home loan is financed only upto 90%, 80% and 75% for property cost upto INR 30 lakh, above INR 30-75 lakh and above INR 75 lakh, respectively. So, the remaining 10-25% will be your responsibility.

This is where banking deposits could play a supporting role to perfection. So, read this post where we will discuss the role of banking deposits not only for getting a home loan but also for paying it off before the scheduled finish. Let’s get started!

So What are the Banking Deposits That Can Enable a Seamless Home Loan Journey?

Banking deposits help your money grow steadily over time. There are many banking deposits – savings accounts, fixed deposits , recurring deposits – where you can put your money and accumulate the required corpus to buy a home.

How Can You Plan Your Home Loan with Banking Deposits?

Above, you saw the banking deposits that you can trust to support your home loan goal. So, you can choose to invest across these deposits optimally to achieve the amount not financed by home loans . Before choosing the amount of investment across these deposits, you should know the home you could buy based on your budget.

Home buying involves planning from the earliest; you need to figure out the property price that you can afford around 2-5 years ago from the date of purchase. Take an annual price hike of 10% and accumulate savings accordingly via these deposits. Knowing the rate of interest you are going to earn on banking deposits will only help you plan better.

Savings accounts of most banks earn you around 3-4% per annum, with a few offering upto 6-7%. Fixed deposits and recurring deposits would have an interest of around 4-7% on average.

How to Distribute Investments Across Different Banking Deposits?

Firstly, you need to estimate the property cost correctly. In case you have planned to buy a property worth INR 25 Lakh presently, it will be around INR 30 lakh in a couple of years. On a property worth INR 30 lakh, lenders can disburse you around INR 27 lakh, leaving you with INR 3 lakh to pay. So, you will need to accumulate INR 1.5 lakh a year.

A fixed deposit of INR 50,000 will lead to a sum of INR 56,325 over 2 years at an interest rate of 6% per annum. A recurring deposit of INR 5,000 monthly will generate around INR 1,27,755 over 2 years at 6%. If you put INR 5,000 monthly in your savings account and don’t withdraw the same, the principal deposit will itself amount to INR 1,20,000. So even if we don’t factor in savings account interest, you will end up accumulating more than INR 3 lakh that you require to buy a home. The total savings will be INR 3,04,080 (56,325+1,27,755+1,20,000).

Banking Deposits Enabled a Home Loan for You – But How Will They Help You Close the Loan Earlier Than Scheduled?

A home loan when allowed to run till the eternity raises your interest burden considerably. Take the case of INR 27 lakh loan. If you take this loan for 20 years, it will lead to interest payments worth INR 25,20,244 via monthly EMI of INR 21,751 at an interest rate of 7.50% per annum. The interest amount is almost at par with your loan amount. You can cut it short by doing a home loan prepayment, which means paying off the outstanding loan balance before the completion of the tenure. So, you need to continue investing in banking deposits and accumulate the required amount to prepay a home loan.

Shall You Check the Home Loan EMI Calculator Before Planning Prepayment via Banking Deposits?

Yes, you should! A Home Loan EMI Calculator draws a repayment schedule before you. Using the calculator, you can check the monthly installment amount, the interest you are supposed to pay over the loan tenure, as well as see the payout of principal and interest amount either month-on-month or year-on-year. You can figure out the time when you could prepay a home loan.

How Much Do You Need to Invest in Banking Deposits to Accumulate the Required Prepayment Sum?

Consider the 27 lakh loan where interest payments can be at par with the loan amount if allowed to continue till 20 years as explained above. If you want to prepay over 15 years, you will save around INR 2,19,570. To save such an amount, you need to pay a prepayment amount of INR 10,85,491 over 15 years. So, you will need to save around 1 lakh every year. Since your pre-home loan savings of INR 3 lakh would have been utilized, you will need to start afresh when planning a savings of INR 10,85,491 over 15 years.

Considering the EMI of INR 21,751, your monthly income should have been at least INR 50,000 to be approved with a home loan amount of INR 27 lakh. In case you earn INR 60,000 monthly, look to save INR 10,000 each month. Now, you can deposit INR 10,000 either in one banking deposit or divide it into three deposits as explained above. If you deposit INR 10,000 in monthly RD, you could surpass the required number. Since things may not go as planned, you might have to incur some unforeseen expenses. You should, therefore, use your yearly income appraisals so that the effect of such expenses can be kept at bay.

Where Should You Open These Banking Deposit Accounts?

The bank you choose for these banking deposits should yield you more on your money. We are here to help you find the banks where you could think of opening banking deposit accounts for both home loan acquisition and prepayment.

Note – FD and RD interest rates of a particular bank remain the same.

Points to Keep in Mind While Opening a Fixed Deposit or Recurring Deposit Account

If you know the minimum and maximum deposit period allowed in a fixed deposit and recurring deposit, it will help you plan more efficiently. Both these can vary from one bank to another. While the minimum deposit period can be for 7 days to 6 months, the maximum deposit won’t exceed 10 years in each of these two banking deposits. Both fixed deposit interest rates and recurring deposit rates depend on the amount and period of deposit. A fixed deposit is an amount you put once and lock it for the period you want to, whereas a recurring deposit means depositing a specified amount every month till the time you want to.

Conclusion

You could see the importance of banking deposits before and after taking a home loan. Here, we have pointed out a home buying strategy based on a property worth around INR 30 lakh. Some of you could go for a property worth more than INR 30 lakh. In that case, the investment amount should increase accordingly. Do use banking deposit calculators and home loan calculators to plan things better.