When a bank gives you a home loan, it is a long-term risk they are taking. For instance, the prices of the mortgaged property could go down or you could get into financial problems. How do banks ensure that you have a greater ownership and commitment to the property that you are buying? It is by insisting on down payment. The home loan down payment can be as low as 10% and as high as you can afford. The minimum down payment for home loan can be anywhere between 20-30%, but you have the option to pay more upfront. We will come back to that point later. Now, let deep dive and understand the concept of down payment.
How do banks decide the minimum upfront amount payable?
That would largely depend on the amount of loan you are eligible to take. For example, if your property costs Rs1 crore and your income documents only make you eligible for up to Rs70 lakhs of home loan, then that is what you would get. Here are some of the key factors that impact the quantum of home loan down payment and the minimum down payment for home loan that the buyer needs to make. Here are the 3 factors that determine how much you have to eventually pay upfront.
- The first and foremost factor is the credit score or the CIBIL score as it is popularly called. Normally, it is a barometer of your credit worthiness and depends on factors like how promptly you have paid your EMIs, what is the outstanding debt, ratio of EMIs to your take home pay etc. A CIBIL sore of 750 is considered to be a good score so your loans can be granted without too many hassles. Credit score also measures your level of trust and whether you are a person prone to wilful default. Normally, if your credit score is above 800, then the banks may consider giving you a higher loan amount, which means you pay less upfront.
- Needless to say, your income level is a key factor. In fact, they don’t just look at the gross pay packet but at the net take home pay and how are your savings and spendings as evidenced by the bank account. For instance, the thumb rule is that the EMI for the home loan should not be more than 40% of your take home pay. If you can manage that, then you can be eligible for a higher loan limit and lower upfront payment. The assumption is that people in higher positions with a standing in society would be less prone to default on their loans.
- The third factor that matters to the quantum of upfront payment is the property value, its location, and its resale value. Why do these things matter? If the property is in good condition, located in a good place with proper connectivity, then it becomes a premium property. Such properties have good resale value and hence the banks would not be overly worried about enhancing the size of your home loan and reducing the upfront margin payable by the borrower.
Apart from these factors, other minor factors like your age, the industry you are working and profession are also factors that go into whether the bank will sanction a higher limit or not. However, the thumb rule is that borrowers must pay as much of upfront margin that they can afford. For example, if the bank is willing to offering 90% of the property value as loan and you can afford to pay 20-25% of the home value as margin, then, just do it. Here are some benefits of paying a higher amount as down payment.
Key benefits of higher down payment
A higher home loan down payment has some distinct advantages. Remember, the minimum down payment for home loan is just for convenience and you should pay upfront as much as you can. Here is why.
- Your loan approval will be smooth if you pay higher upfront. After all, every bank and NBFC loves if the customer has more skin in the game.
- Higher downpayment will serve you better. It reduces your EMI amount and makes you more credit eligible for other purposes in future. That is critical. This also means that you pay less of interest during the tenure of the loan.
- Every loan impacts you credit score or CIBIL score and lower the borrowed amount, the lesser the impact on credit worthiness at CIBIL. That will help you in the long run.
- You are more likely to end up with positive home equity. That is the net market value of your home; less the outstanding loan. You are creating and retaining a high value asset faster than you originally imagined.