What is Margin Money in Home Loan

Decode what is margin money in home loan, through its meaning, requirements, importance, and more to plan your margin contribution and overall credit intake efficiently.

Financing a dream home might be your first concern as a home buyer. While home loan options serve as an efficient and popular tool in this regard, its efficiency depends significantly on optimal credit planning. In the case of home loan financing, apart from credit terms like interest, tenure, processing fee, etc., one more condition plays a significant role: margin money.

While taking a home loan, a part of the total cost has to be borne by you, the homebuyer. This is called margin money and it denotes your own commitment to the home purchase, thereby yielding significant influence on your home loan particulars. Therefore, before opting for a housing credit, you must understand what is margin money and how to optimise it.

Lenders who extend home loans do not finance the full cost of property purchase. Margin money for home loan refers to the portion of the property’s cost that you have to pay from your own funds, before taking credit to finance the remainder. 

For instance, Mr A wants to take a loan for a flat that costs ₹30 Lakhs and thus approached the XYZ bank. XYZ offered to cover 80% of the cost, that is ₹24 Lakhs, while the remaining ₹6 Lakhs has to be Mr A’s own contribution. In this case, the ₹6 Lakhs paid by Mr A is called a margin money or down payment.

The amount of margin money paid has a significant influence on interest and EMI payable. The impact of choosing a high or low margin is discussed below.

• High Down Payment: The total interest and EMI payable decrease with an increase in margin contribution.

• Low Margin Contribution: The total interest and EMI payable increase with a fall in margin contribution.

For example, suppose Mr A makes a down payment of ₹10 Lakhs instead of ₹6 Lakhs on his ₹30 Lakhs flat, and takes the remaining amount as loan. His EMI will fall from ₹46,959 to ₹39,132, assuming a 6.5% interest for 5 years.

The percentage of a property’s value that banks, non-banking finance companies (NBFCs), or housing finance companies cover depends upon their own corporate policy. Subsequently, depending on the lender’s criteria, you can decide the amount you wish to pay as down payment for an effective credit strategy.

The table below highlights some typical margin money requirements from different banks and NBFCs.

Margin money is an important home loan eligibility that you must meet to get your credit approved. Moreover, since the home loan margin is a lump sum value, you must employ optimal financial strategies to arrange it. Discussed below are some of the strategies.

• Begin saving early: If you start saving well before you plan to purchase a property, you can create a sufficient pool to meet the margin money requirements.

• Investments: Only savings are often not enough to build the pool required as home loan down payment in time. You can invest the saved funds into assets within your risk tolerance to get additional returns.

• Creating budgets: You can create budgets to maintain control over your expenses, such that you can stay on track with your saving and investment plans to raise sufficient funds for margin money.

• Debt: You can take short term loans against your savings account or get a top-up on an ongoing loan to meet the margin money requirement. After understanding how much margin money is required for a home loan, if your savings and own funds fall short, this option can help meet the deficit.

• Liquidating wealth: If you have any asset, like fixed deposits, mutual funds, etc., you can liquidate them to raise a sufficient corpus.

Since margin money is itself a requirement of securing a home loan, there is no separate document requirement list. However, there are some documents that cater specifically to prove and substantiate the margin money payment and application. Discussed below are some of them.

• Margin money receipt: It is a specific document that is given by the developer or seller to specify that they have received the down payment from you. 

• Payment proofs: You might also need to provide payment confirmations proofs, like copies of cheque or demand draft to substantiate the payment.

• Housing loan documents: You must also meet the documentary requirements of the home loan in general to finally get the loan sanctioned. Some common documents include salary slips, income tax returns, bank statements, etc. 

A higher margin payment, exceeding the minimum requirement, can help get favourable repayment terms. Listed here are the benefits of paying a higher margin on a home loan.

• Home loan amount reduction: Increasing the upfront payment by increasing the margin downpayment, you can reduce the loan amount. This can ease the credit burden substantially.

• Total interest payable: As the loan amount reduces, through a rise in margin, the total interest accrued on your home loan will also fall.

• EMI liability: With a reduction of principal and interest, the EMI payable every month will also reduce.

• Shorter repayment tenure: You might be able to repay your debt faster through higher down payment and lowered debt burden. This can make the property collateral free sooner.

Despite the key benefits, there are some drawbacks of paying a higher margin. They are discussed below.

• Short-term liquidity crunch: Paying a higher margin might require you to liquidate substantial savings and investments, resulting in liquidity crunches.

• Opportunity cost: A high down payment might require you to give up on other profitable uses of the funds.

• Ineffective funding of down payment: Often taking on hasty and uncalculated debt to pay a high down payment might end up increasing the credit burden, rather than decreasing them. If financing margin through debt, it must be within your borrowing capacity.

After understanding what is margin money in home loan, you must keep the following important aspects of the same in mind.

• Although banks have a minimum margin requirement, making a higher payment can help reduce your EMI burden and overall credit stress.

• You must have a sufficient corpus for margin payment before applying for a loan.

• Without a margin downpayment, your home loan application will get rejected. It is a key eligibility criteria.

The nature of margin payable can differ based on different situations. Discussed here are some cases to illustrate the same.

• Property purchase downpayment: Suppose a property has a market value of ₹40 Lakhs. If the housing finance company pays 80% of the value as loan, the remaining 20%, that is ₹8 Lakhs, becomes the downpayment. 

• Top-up in case of a shortfall: If the final value of the property increases from ₹40 Lakhs to ₹42 Lakhs due to additional charges like the stamp duty, registration costs, etc., and the housing finance company does not want to cover the excess in the loan, it has to be paid by you. Therefore, the margin increases from ₹8 Lakhs to ₹2 Lakhs.

• Margin on under-construction properties: If the property is under construction, the margin can be paid in installments, according to the stages of construction completion. For example, 20% of the margin might be paid upfront and the rest in installments depending on the stages. 

Margin payment in case of home loans shows your commitment to the property purchase, making it a key eligibility requirement of the home loan process. Therefore, optimal planning and financing of home loan margin is necessary to reduce the debt burden and repay the loan in a shorter period. Early savings and planned investing plays a key role in this regard.