When you buy a house today, a home loan is inevitable, considering the spike in home prices across India. Did you know that the buyer of the home must put in a part of the property cost upfront? That is also called margin or owner equity or home loan down payment and ensures skin in the game. If the owner knows that his own money is also at stake, they tend to be more meticulous about servicing the loan. That is why banks insist on down payment for any loan. The minimum down payment that lenders insist on ranges from 10% to 15%. However, question is; how much down payment for home loan should a borrower make?
Understanding LTV and down payment in home loan
As the name suggests, the down payment on a home loan is the amount you pay upfront to the builder or seller; and is a key consideration for the bank. Generally, home buyers calculate the amount of loan they can get and then calculate the down payment needed. Regarding down payments, an important concept is loan to value (LTV); the acceptable loan assessed by the bank as percentage of home value. Higher the LTV, lower down payment needs to be made. Under RBI norms, LTV limit can go up to 80% for loans ranging between Rs30 lakh and Rs75 lakhs, and to 75% loans above Rs75 lakhs. The general LTV offered across home loans ranges between 80% and 85%.
Key lesson: Down pay as much as you can manage
If you can pay 30% of the property value, even if the bank agrees to fund 85%, don’t fall for it. Paying a high down payment can be positive in a number of ways.
- A higher down payment enhances the image of the borrower with the bank as you come across as a person willing to show more commitment and also having a larger chunk of savings available. Lenders prefer prudent borrowers.
- The higher down payment helps loan costs in two ways. Firstly, banks offer lower rates of interest if down payment is a bigger chunk of the loan. Also, lower loan amount means lower EMI, and that reduces the long-term pressure on your finances.
- The third benefit of a higher down payment is that the lower EMIs can be substituted for shorter tenure. For instance, if the EMI comes to Rs40,000 per month and you can afford EMIs of up to Rs60,000 per month, work with the bank for a shorter tenure loan. That way, you are free of your liability earlier and the home title is clean.
In a nutshell, there is merit in opting for a higher home loan down payment. Your down payment decision or how much down payment for home loan to made, should be determined by your affordability and not availability. Higher the better!
How to save for your home loan down payment
The beauty of financial planning is that any goal that can be measured can be planned for. In this case, you need a plan as the down payment for home loan can be substantial. If you are looking at a property of Rs1.50 crore in Mumbai after 3 years, your EMI at 8.5% for 30 years would be Rs1,15,337 per month.
Obviously, the bank will not fund the full amount and insist on 15% margin, which is about Rs22.50 lakhs. You currently have Rs10 lakhs, so you need to plan the balance Rs12.50 lakhs in 3 years. You can afford to save about Rs30,000 for 3 years, specifically for this. Here is how it works.
Being a 3-year investment and considering the urgency, equity funds will be too risky. A better choice would be a high quality G-Sec fund. The top-3 G-Sec funds (as per Morningstar rankings) have provided about 8.3% returns CAGR over the long term, which we can use as a proxy. Here is how the plan looks.
| Particulars |
Principal Amount |
Tenure |
Final Amount |
| Lumpsum Amount |
10,00,000 |
3 years |
Rs12,70,000 |
| SIP of Rs30,000/pm |
10,80.000 |
3 years |
Rs12,30,000 |
| Total after 3 years |
|
|
Rs25,00,000 |
By a little bit of planning, you end up paying down payment of Rs25 lakhs, more than the Rs22.50 lakhs that the bank was insisting. That means, your actually loan amount would be Rs1.25 crore and your interest rate could be reduced from 8.5% to 8%. Your new EMI, therefore, would be Rs91,721. Of course, if you feel you can afford a higher payment of say Rs.1.05 lakhs per month, you can even reduce the tenure to 20 years instead of 30 years. That is how a little bit of planning can go a long way in making your home loan experience simpler.