A home loan may be your big step towards your dream home. To be eligible for a home loan, most of the lenders demand borrowers to pay a small portion of the loan amount upfront and this is called home loan down payment. The portion of the home loan you have to fund is calculated based on your eligibility and the minimum will be 10% of the total principal amount.
According to RBI, the banks and NBFCs in India can only provide 80% of the property value as a home loan for loans above the amount of Rs. 30 Lakhs. The rest should be funded by the borrower themself. For amounts lower than Rs. 30 Lakhs, the lenders provide 90% of the property value and the borrower has to pay 10% as the down payment for the home loan. This may vary according to the property value. As the property value increases, the home loan down payment percentage also increases.
Let us take a look at the details of the home loan down payment here.
Here are the features and benefits of home loan down payment.
Lower interest rates: If you pay a minimum down payment for a home loan, you will get a reasonable housing loan interest rate. This will significantly reduce the EMI and the total interest payout.
Builds trust between borrower and lender: When you pay the down payment on a home loan, it comforts the lender and makes them trust you more. The home loan down payment decreases the risk and increases the repayment chances.
Long tenure stretch: If the down payment required for home loan is paid on time, it will help you get a longer loan tenure from the lender.
Lower processing costs: Lenders will be willing to provide lower processing charges if you pay a good amount as down payment to buy a house.
Easy Approval: When you make a down payment, it shows you have a higher chance of repayments, and hence, it results in an easy home loan approval.
Start early: The most practical and safe way to accumulate funds for your home loan down payment is to start saving money earlier. You can start it from the beginning of your career and save it for your dream home. Later, you can build a corpus out of your savings. Initially, you could start with investing your savings in high-return investments like equity and later transfer the gains to a safer investment option like FD. Always maintain a budget and keep your expenses on track so you can follow your plan.
Utilise investments: Investments like FD, Mutual Funds can be used to fund the down payment on a house. If you fall short of the amount for the down payment, you can break a part of the investment. Else, you can avail of secured loans against these investments. FDs and Mutual Funds provide options for that.
Avail of a loan: You can opt for a loan for down payment on the house. An unsecured loan would be the best option to fund a down payment in case of emergency. You can avail of personal loans up to Rs. 5 Lakhs for this purpose from any lenders if you have a good credit history.
The ‘Proportionate Release’ option: Select lenders offer proportionate release options on home loans for new construction projects promoted by select developers. Rather than as a lump sum amount, you can pay the down payment in small amounts over time. Since the construction takes years, you can pay your down payment in instalments and the lender will release your loan disbursements accordingly.
Take help from your organisation, family, or friends: Certain organisations offer loans for their employees in times of need. You can opt for that if you have a favourable employee-employer relationship and significant work experience in the organisation. As a last resort, you can also take help from your family or friends. Since the relations are at stake, it would be best to think through this before taking a decision.
Generally, lenders give you options to pay a minimum amount as home loan down payment or make a larger down payment if you can afford it. You can choose one as per your financial condition. However, each has its own advantages and disadvantages. Let us take a look at the pros and cons of making larger down payments here.
When you pay a larger down payment, the rest of the loan amount will be lower. Hence, this may fetch you a lower interest rate depending on the lender’s policies.
A larger down payment ensures you own the property’s larger equity and that will lower your dependence on borrowed funds.
The lenders will be comfortable with higher down payments due to decreased risk elements. So, it enhances the chances of faster loan approval.
Since the lenders offer cost cuts in processing fees and home loan insurance premiums, if you make a huge down payment, it will help you save more money.
The chances of financial problems during an emergency will be high since your funds will be locked up for a long term. As part of this, the liquidity will be lower.
When you make a huge down payment, your loan amount will be lower. This will lead to a decreased home loan repayment tax benefits both on the principal and interest component.
If you pay a bigger amount as down payment, you may fall short of money for the initial expenses such as repairs and renovation, interior decor, etc.
The minimum down payment for a home loan will be 10% of the property value.
No, banks can’t give 100% home loans. According to RBI, the banks and NBFCs in India can only provide 80% of the property value as a home loan for loans above the amount of Rs. 30 Lakhs.
You can arrange your down payment on a house in various ways. Some of them are:
Saving up money from the beginning of your career
Utilising the investments you made or taking a loan against them
Avail of a personal loan
Choose the proportionate release option and pay the down payment in instalments
Take help from your organisation, family or friends
Ideally, you cannot get a home loan without paying a down payment. However, you can take appropriate measures to reduce the burden of down payments.