Home Loan Down Payment

Every potential home buyer has two aspects to consider when they think of arranging the funds to buy their new house:

• The Home Loan amount, which their lender will disburse
• The Down Payment amount – a portion that will not be covered by their Home Loan sanction

No lender is permitted to fund the entire cost of the property, which leaves you to arrange the deficit, namely, the down payment.

So, effectively, to purchase a property through external finance, you will need to pay a share of the property value yourself. And for the remaining amount, you can avail of a Home Loan

Many choose to opt for a personal loan to fund the down payment amount, but by putting in your own money, you not only reduce your total cost of borrowing (since there is no interest on your own funds) but also validate your financial standing in the eyes of your Home Loan lender.

Lenders employ the Loan-to-Value (LTV) ratio while calculating what percentage of the property’s cost they can sanction as the Home Loan amount. As per the RBI mandate, the current Home Loan LTV ratio stands at 70%* to 75%* of the property value, i.e., they can fund only up to 90% of the cost, and not more.

Here is the RBI’s LTV policy on Home Loans:

Here are some other benefits of making a sizeable down payment:

• You have a lower dependency on borrowed funds
• A request for a smaller loan amount means a lower percentage of interest outflow
• Your Home Loan eligibility is higher, as your lender sees your application as comparatively less risky
• You stand to benefit from more competitive lending terms

While making a sizeable down payment has many benefits, it does not change the fact that it is money out of your pockets and could impact your personal finances significantly. Many borrowers are wary of liquidating their assets and anticipate a fund crunch, at a time of need.

However, if planned for properly, putting down a substantial amount as a down payment will serve you well in the long run. Here are some tips that may help in the preparatory phases of your home buying journey:

• ​Start Saving Early: If buying a house has been on the horizon for a while, you will do well by saving from an earlier age. This way, you will have funds put aside with the intent of buying a house and will not have to dip into your savings. 
• Explore Partial Payment Options: Many developers offer a part-payment option, wherein you have to pay the down payment in chunks, as new phases of the property’s construction are completed. This allows you a more relaxed timeframe to complete your down payment. However, this is not a standard rule and depends on your project developer. 

Tips for Saving for a Down Payment

The 50:30:20 rule: One of the formulae by which one can achieve significant savings for a down payment is by using the 50:30:20 rule. Here, 50 is the ratio you set aside for fixed expenses, 30 for discretionary expenses and 20 for savings. Buying a house requires a serious amount of money – an amount that may not be accumulated overnight but can be collected through days and months and years of seemingly small savings.

Invest in secure growth avenues: When the thought of buying your own house strikes you, that’s when you should ideally start taking steps to keep aside a certain amount as investment. It could be in the form of a savings bank account, a fixed or recurring deposit, a mutual fund, gold, PF, etc. Investments that can easily be liquidated are a good source of Home Loan down payment.

Get ready for some (significant) lifestyle changes: In order to buy a house, you should ideally start saving at least 4 to 5 years ahead of time. One way to achieve that is by adopting a modest lifestyle – at least for the first few years. If you are living in a rented apartment, consider moving to one with lesser rent. If you spend on clothes, apparels and foods – consider cutting down on them. Try to live as tight as possible without compromising on your happiness and mental health. Use these days as motivation for the days to come!

*Terms and conditions apply

Also read: About NOC for Home Loan

Lenders specify the minimum down payment for Home Loan that needs to be made in order to avail a loan. However, you may choose to pay as much as you want provided you understand the pros and cons of a higher down payment.

Pros of Making a Higher Down Payment

• You own a larger equity in the property and thus lower your dependence on borrowed funds.
• With a higher Home Loan down payment, your dependence on loan is reduced.
• You can avail lower rates of interest, lower EMIs, lesser tenor and potentially lower interest payment by the end of your tenor.
• You may get your loan without hassles as lenders may quickly sanction a low amount
• Your stress to repay significantly reduces, allowing you to save the excess money or invest the same.

Cons of making a Higher Down Payment

• Locking up maximum funds leave you with less cash at hand. This may lead to a financial crunch during an emergency.
• Your Home Loans are eligible for tax savings up to Rs.3.5 Lakh – hence you may miss the chance to save more money in the form of tax deductions as opposed to money saved from a low down payment.
• When you expend most of your saved money on down payment, you may be left with very little for the initial expenses such as furniture and consumer durables, repairs and renovation, etc. to make your house a home.