Home Loan Down Payment

The down payment you decide to pay plays a very crucial role in determining the terms of your home loan like the loan amount and interest rates. For example, if you pay about 30% of the property’s value as a down payment, you can get a home loan for the remaining 70%. 

As per this, the interest rate is charged only on the amount borrowed, thus, impacting your EMIs and the overall cost of your loan.

According to the RBI, banks and NBFCs in India can only provide up to 80% of the property value as a home loan for loans above ₹30 Lakhs. The rest should be funded by the borrower themself. For amounts lower than ₹30 Lakhs, the lenders may provide up to 90% of the property value. 

In such cases, the borrower will be required to pay the remaining 10% as a down payment. However, this may vary according to the property value. As the property value increases, the home loan down payment percentage also increases.

Generally, lenders give you options to pay a minimum amount as a home loan down payment or a larger amount, if you can afford it. You can choose either 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.

Advantages 

• Lowers overall loan amount, which could fetch you a lower interest rate depending on the lender’s policies  

• Ensures you own the property’s larger equity and this will lower your dependence on borrowed funds

• Increases the chances of a faster loan approval

• Lenders may offer cost cuts in processing fees and home loan insurance premiums, helping you save more money

Disadvantages

• Reduced financial capacity in the events of an emergency since your funds will be locked up for a long period  

• Lowered home loan repayment tax benefits on the principal and interest amount 

• Lesser funds to finance expenses such as repairs, renovation, interior decor, etc.

In order to make a huge down payment, it is important to plan your finances well in advance. Here are some tips to help you make a larger down payment without straining your finances.

• Start Early

The most practical and safe way to accumulate funds for your home loan down payment is to start saving money well in advance. Initially, you could start by investing your savings in high-return investments and later transfer the gains to a safer investment option like fixed deposits. Ensure to always maintain a budget and keep your expenses on track.

• Utilise Investments

Investments like FD and mutual funds can be used to fund the down payment of a house. If you fall short of the amount for the down payment, you can withdraw a part of the investment. Or else, you can get a secured loan against these investments. 

• ‘Proportionate Release’ Option

Some lenders offer proportionate release options on home loans for new construction projects promoted by select developers. So, you can pay the down payment in small amounts over time  instead of making a lump-sum payment. 

Since the construction takes years, you can pay your down payment in instalments and the lender will release your loan disbursements accordingly.

• Borrow Funds 

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. Alternatively, you could consider reaching out to your relatives or friends and borrow the necessary funds.