What is the Ideal Down Payment for a Home Loan?

Most people rely on home loans to fund property purchase. Home loans are a convenient and safe way to buy a home. When a borrower takes a home loan, the lender sanctions up to 75% to 80% of the property's market value as a loan. The remaining amount must be paid by the borrower and is known as the home loan down payment. Lenders ask for a home loan down payment to make sure the borrower has a stake in the property-- the higher the down payment made by the borrower, the higher their stake in the property and the lower their chances of loan default. In this article, we look at the minimum home loan down payment requirements for home loans and the benefits of paying a high or low-down payment.  

What is the Minimum Down Payment Required for a Home Loan in India? 

In India, the minimum down payment depends on the value of the property you are buying. If the home you plan on buying is worth Rs.30 Lakh or less, you will easily be able to raise 90% of your property's value as a loan, provided you have a clean repayment history, an impeccable credit score and a stable job and income. If your property is worth anything between Rs.30 and Rs.75 Lakh, you will be able to avail of up to a maximum of 80% of your property's market value as a loan. However, if the home you plan on buying with the housing loan is worth above Rs.75 Lakh, your LTV ratio cannot exceed 75%. In other words, you will have to arrange 25% of the property's value as down payment as the maximum loan value you can get in this case will be 75% of the property's value.  

Those planning to apply for a housing loan must use a home loan calculator to figure out the loan amount they qualify for. Having an idea of what they qualify for and can afford allows people to align their home search with their financial standing. Further, it also allows them to understand what is the home loan down payment they must arrange for and take  the required steps in that direction.   

Let us now look at the benefits of paying only the minimum home loan down payment.  

Benefits of Paying Only the Minimum Down Payment for a Home Loan

When it comes to home loan down payments, borrowers are advised to make as high a down payment as they can comfortably afford. However, some home loan borrowers prefer to pay the minimum housing loan down payment required. There are certain advantages to this. Here are some of the benefits of paying the minimum home loan down payment.  

• A lot of the times, people arrange for a higher down payment by breaking their savings. This is not a good idea. Individuals must try and keep their savings safe for a rainy day, especially if they are availing of a home loan. Life is unpredictable. Sometimes people lose jobs, sometimes medical emergencies happen. In such a case, it is a person's savings that help them through the rough patch. Thus, one should never exhaust all their savings, just to arrange for a higher down payment.  

• Yet another advantage of paying the minimum down payment required is that one can use the money they have with them to invest in other options that are likely to bring higher returns in the short run and then use the money to make home loan prepayments and foreclose their loan so that they become debt-free sooner. 

Benefits of Paying a Higher Home Loan Down Payment 

Though it cannot be denied that there are certain advantages of paying the minimum down payment, borrowers must try and arrange for as high a down payment as they can. This helps in several ways.  

• To start with, when a borrower pays a higher down payment, they reduce the risk involved for the lender in becoming a part of the whole deal. Thus, when borrowers pay a higher down payment than the minimum amount required, lenders offer them better loan terms and conditions, including lower interest rates. Lower interest rates help borrowers keep their EMIs affordable, which makes home loan repayment easier. 

• If you are someone with an excellent credit score and you have also saved up enough money to pay more than just the minimum amount due, you will have much higher negotiating power with your lenders. You are a responsible borrower who can be trusted with timely repayment of loan money. Further, you are ready to increase your stake in the property, which means further reduced risk for the lender. Therefore, any lender would want you as a client. This means you have high negotiating power. You can ask for lower interest rates, higher loan sanctions and a long repayment tenor to clear your EMIs. All of these things combined will help you have a better home loan experience.  

• A higher home loan down payment directly translates into low housing loan interest rates, which in turn, leads to reduced total interest payout and therefore, reduced cost of borrowing the loan. Thus, when a borrower opts for a higher housing loan down payment, they are able to save more in the long run, primarily due to a lower principal amount and low interest rates on the loan. 

Final Words

In India, most lenders require borrowers to pay about 20% of a home's value as a home loan down payment. Thus, if you are planning to buy a house, you must try and make sure you have saved up 20% of the home's actual value to be paid as down payment. However, if you can afford to pay a higher down payment without dipping into your savings or compromising your future financial goals, you should go ahead and do so. A higher down payment will reduce your principal amount, which in turn, will also lower your EMIs. Further, a higher down payment will also give you the power to negotiate for a better interest rate, which in turn, will make your EMIs further more affordable. Affordable EMIs make paying off loans easier and therefore, it is a good idea to try and pay a higher down payment and make your EMIs as affordable as possible.