Advantages and Disadvantages of Making a Larger Down Payment on a Home Loan

Posted in Housing Articles By Sajhyadri Chattopadhyay-
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If this is your first time exploring the ins and outs of housing finance, you might wonder — what is a down payment? Consider a home loan down payment as your upfront investment when buying a house in India. It's a percentage of the property's total cost you pay from your pocket while your home loan covers the rest. It's like signalling your commitment to making your homeownership dream a reality! 

But have you considered the effects of making a larger down payment? Let's go over some of the pros and cons. 

Pros and Cons of Making a Larger Down Payment on a Home Loan

Opting for a larger down payment offers several perks for your Indian homebuying journey – 

  • Reduced Interest Burden: 

Making a larger down payment significantly reduces the principal amount you borrow. This minimises the interest burden over the loan tenure. Imagine, the amount you save on interest costs, you can allocate to other financial goals such as education, travel, or investments! 

  • Lower Monthly EMIs: 

A substantial down payment leads to lower EMIs and higher financial flexibility each month. This means more room in your budget for unexpected contingencies and lifestyle expenses alike! This fosters a sense of financial security. 

  • Improved Loan Eligibility: 

A larger down payment enhances your loan eligibility. Lenders often consider a lower Loan-to-Value (LTV) ratio favourably. For instance, if you aim for a property worth ₹1 Crore and make a down payment of ₹30 Lakhs, you may be eligible for a more substantial loan amount. And just like that, you are empowered to choose a more desirable property! 

  • Favourable Loan Terms: 

Lenders may offer better terms to borrowers with larger down payments. Apart from lower interest rates, you can also negotiate reduced processing fees, better payment flexibility, and more! Picture yourself securing a home loan with terms that align with your financial goals, thanks to your strategic down payment. 

  • Quicker Loan Approval: 

A significant down payment signals financial stability to lenders, expediting the loan approval process. With a quick approval, you gain a competitive edge in the real estate market. Imagine closing the deal on your dream home faster, seizing favourable market conditions, and avoiding potential price hikes! 

 

While a larger down payment has its advantages, it's important to consider potential downsides – 

  • Reduced Liquidity: 

Putting a significant amount into the down payment might tie up funds that could be useful for emergencies or other investments. What if you face an unexpected financial emergency and a substantial portion of your savings is locked into the property? 

  • Opportunity Cost of Funds: 

The funds used for a larger down payment could potentially yield higher returns if invested elsewhere. Remember to factor in the opportunity cost of not investing in avenues that may offer better returns than the interest savings on the home loan. 

  • Impact on Cash Flow: 

A larger down payment may impact your immediate cash flow. If a substantial portion of your savings is used for the down payment, it could potentially affect your day-to-day financial flexibility. 

  • Missed Tax Benefits: 

In India, home loan repayments come with tax benefits. Making a larger down payment means a smaller loan amount, resulting in reduced interest payments. Thus, you could miss out on maximising certain tax benefits. 

  • Market Conditions and Investment Returns: 

The real estate market is dynamic, and its performance may vary. What if you invest a significant amount in the down payment, and later the property value does not appreciate as expected? This could affect the overall returns on your investment. 

Tips to Save for a Larger Down Payment on Your Home Loan

Saving for a larger down payment requires strategic planning. Here are five unique tips to help you accumulate the funds – 

  • Automate Savings: 

Set up automated transfers to a dedicated down payment savings account. For instance, if your goal is ₹20 Lakhs in five years, schedule monthly transfers of ₹30,000. This disciplined approach ensures consistent savings without manual effort. 

  • Create a Down Payment Fund: 

Establish a separate account exclusively for your home down payment. To motivate yourself, you can label it the "Dream Home Fund"! By mentally associating the funds with your homeownership goal, you're less likely to dip into it for non-essential expenses. 

  • Cut Unnecessary Expenses: 

Identify and cut out non-essential expenses. For example, if you spend ₹5,000 monthly on dining out, reducing it to ₹2,000 can save ₹36,000 annually. Redirect these savings to your down payment fund to accelerate your path to homeownership. 

  • Side Hustles and Freelancing: 

Explore side hustles or freelancing opportunities for additional income. Whether it's freelance writing, graphic design, or tutoring, the extra earnings can contribute directly to your down payment fund, allowing you to reach your goal faster. 

  • Take Advantage of Windfalls: 

Allocate unexpected windfalls like bonuses, tax refunds, or gifts directly to your down payment fund. For example, if you receive a ₹50,000 bonus, earmark a significant portion or the entirety for your home down payment, giving your fund a substantial boost. 

 

A larger down payment emerges as a key strategic move that brings multiple advantages. While there are certain drawbacks as well, it's essential to weigh both the pros and cons of larger down payment on a home loan to make a wise call. With a clear picture in mind, browse various home loan providers on Bajaj Markets and get amounts up to ₹15 Crores at just 8.50% interest p.a. Benefit from a hassle-free borrowing experience with instant approval, quick disbursals and more! 

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