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What does Down Payment Mean?_WC

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:

Home Loan Sanction Amount LTV Ratio for Home Loan
Up to Rs.30 Lakh Cannot exceed 90%
Between Rs.30 Lakh to Rs.75 Lakh Cannot exceed 80%
​Above Rs.75 Lakh Cannot exceed 75%

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. 

*Terms and conditions apply

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