Buying a house becomes much easier once you avail of a housing loan. However, according to RBI guidelines, lending institutions cannot finance the entire cost of a house. They can extend loans up to 90% of the property’s current market value. The borrower has to pay the remaining balance, commonly referred to as a down payment. The greater your down payment, lesser the loan amount that you need to borrow. As a result, a lower loan principal implies that you are required to pay a smaller interest all through the tenor.
How Should You Plan Your Home Loan Down Payment?
Individuals who wish to secure a housing loan must budget for their down payment prudently. This can be achieved in the following ways:
Save up for the Down Payment
Saving up for a home loan down payment is always the best option. It has to be planned well in advance so that one may boost their financial portfolio through investments in recurring deposits, gold, mutual funds, etc. alongside maintaining adequate cash in the bank. This way your small savings can fetch you better returns for the down payment. You can also consider directing your tax refunds towards setting up fixed deposits. Moreover, limit unnecessary expenses and save up on a monthly basis to create a separate fund to this end.
Liquidate Assets and Investments
You can opt for liquidating your investments such as fixed deposits, mutual funds, provident funds and so on. A down payment can also be arranged by selling assets like land, property or vehicles. But if these are likely to be your source of income in the coming years, you should exercise restraint to ensure financial stability.
Secure Another Loan
This basically means obtaining another loan in addition to the home loan, provided you can comfortably pay the EMIs on both loans. To assess loan affordability, calculate the EMIs on the proposed home loan using a Housing Loan EMI Calculator and check the loan amount and tenor that best suits your requirements. Remember to calculate the EMIs for the other loan as well, to see if you can handle two different loan repayments at the same time before you take a decision.
Borrow from Other Sources
Individuals can borrow the necessary funds from their employer or company if the latter promises financial assistance with reasonable riders. And, if you still fall short, you can even ask your friends and relatives to pitch in, as long as you repay their money within a mutually agreed timeline.
Benefits of a Higher Down Payment
The most significant benefit of paying a higher down payment is that the loan amount decreases which automatically lowers your financial burden. Thus, it minimises the chances of a loan default depicting you as a low-risk borrower, thereby raising your home loan eligibility. Since this reduces the credit risk, lenders will show more confidence in your repayment potential and may sanction your loan faster.
Borrowers can enjoy several advantages if they make a bigger down payment over and above the required amount. These include:
- A larger down payment brings down the loan amount that can fetch you lower interest rates based on different loan slabs. For example, a Rs. 30 lakh home loan may attract lower interest rates as compared to a loan of Rs. 50 lakh.
- Lenders may show more willingness to discuss waivers and reduce housing loan-related charges such as administrative fees, service charges and other fees or penalties.
- The monthly EMI outflow is much less when you make a hefty down payment.
- You may be able to secure attractive loan terms due to limited monthly obligations which assure lenders of timely repayments. A lower Debt-to-Income (DTI) ratio is one of the pre-requisites of the basic home loan eligibility criteria and it can further improve your chances of availing any future credit.
- A higher down payment increases your equity in the house and helps close the loan earlier.
Demerits of a Larger Down Payment
Just as there are several merits to a large down payment, it has certain pitfalls too, such as:
- A home loan down payment is a substantial sum for which individuals need to carefully plan their savings. If they take up a loan for the down payment, they could end up with a bigger interest burden. This may happen because house loan interest rates are usually lower than the interest rates on other types of loans.
- After buying the house, you may need significant cash for interior decoration, furnishing and so on. When you pay more for a down payment, you may have to pull back on these housing essentials.
- A huge chunk of your money gets locked in a fixed asset when you bear larger down payments. This may not support enough liquidity for other commitments such as funding children’s education, business expenses, retirement corpus or emergencies.
- A heavier down payment gives you a reduced loan amount. It must be noted that the home loan tax benefits that you can claim in this case will naturally be lower than the tax deductions for a higher loan amount.
What Is the Ideal Down Payment Sum?
A home loan down payment is a percentage of the total value of the house and calculating the correct amount that one should tender as a down payment is crucial to ensure comfortable EMI pay-outs. Your down payment depends on multiple aspects as listed below:
- The cost of the property
- Home loan amount
- Your present and future cash flow
- Home loan interest rates
- Repayment tenor
The down payment normally ranges from 10% to 20% of the property’s market value. However, any amount under 20% may require mortgage insurance. It is recommended that you put down an appropriate sum as per your financial situation, which should ideally leave you with sufficient funds to handle your regular expenses and also take care of any unforeseen circumstances.
Your monetary requirements throughout the tenor will influence how much cash you could pay upfront. Once you set aside the required sum for future expenses, you can easily evaluate how much money you may be left with. Down payments do not include miscellaneous expenditures such as property taxes, registration charges, transfer charges and stamp duty costs. Hence, one needs to factor in these allied costs to gauge what they can offer towards a home loan down payment.