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How to Plan Your Home Loan Down Payment

While a housing loan helps you fund your property purchase, lenders still don’t usually give you a hundred percent of the property’s value as the loan amount. The ratio that lenders use to sanction your loan amount against the property’s value is called to loan to value ratio. The remainder of the property’s cost must be directly borne by you, in the form of a down payment and you must take it into account when you plan to buy a house.

In this article, you will be equipped with the right information about your home loan down payment.

What does Down Payment in Home Loan means

To take a home loan, you need to fund a portion of the cost of the home while the lender the rest. Usually, the amount you pay depends on your home loan eligibility, and it’s usually a minimum of 20%.

This portion that you need to fund from your pocket towards the cost of your home loan is referred to as the home down payment, and it’s a vital aspect of a home loan application. In fact, when lenders see that you are liquid enough to comfortably fund your down payment, their faith in your repayment capacity is boosted.

According to the Reserve Bank of India (RBI) rules, lenders in India can only provide 80% of the property value as a home loan, while the borrower has to arrange for the balance of 20%. There is no maximum limit for the down payment on a home loan.

A higher down payment leads to a smaller home loan amount and consequently reduces the home loan EMI. Therefore, you should go for a higher down payment whenever possible.

What is the Minimum Down Payment Required for a Home Loan

The minimum down payment for a home loan is 20% of the total value of the property. For houses aged 15 years or more, lenders may sanction home loan amounts not exceeding 50% of the total market price at the time of valuation. In such a case, the minimum down payment will be more than 20% of the total value of the property. 

Large vs Small: How Big a Down Payment Should You Make?

To answer the above question, be informed that lenders determine the minimum amount for your down payment. You may opt to stick to the minimum or make a larger down payment if you can afford it.

Lenders may also charge a fee after you make a small down payment. This fee is a premium fee for mortgage insurance—the lower your down payment, the higher the fee. The lender can also charge a higher home loan interest rate instead of the fee.

Paying a larger down payment on a home loan reduces the likelihood and severity of the price decline that can put you in a negative equity situation. For a conventional home loan, the lender may ask for private mortgage insurance to be added to the monthly payment if the borrower is offering only the minimum down payment for the home loan. This can increase the Equated Monthly Instalment (EMI) substantially.

A large down payment on a home loan means a smaller home loan amount, meaning that the monthly payments will be lower for you. Also, you will get a better home loan interest rate and better terms if you’re offering a higher down payment. This may be important if you have a bad credit score.

Pros of Making a Higher Down Payment on Home Loan

Below are the benefits of making a larger down payment on a home loan:

  • You own larger equity in the property and thus lower your dependency on borrowed funds.
  • A lower loan amount may fetch you a lower interest rate as rates typically vary for different slabs of loans. For example, a Rs.20 lakh loan may attract a lower interest rate than a Rs.30 lakh loan.
  • A lower loan amount offers greater comfort to the lending institution and therefore enhances the chances of quicker loan approval.
  • Lenders treat a higher down payment on a home loan as an indication that you can save money. This increases your creditworthiness.