What is Meant by a Down Payment on a Home Loan?

What is a Down Payment?

A down payment is an initial installment of a currency that a purchaser pays in the beginning phases of buying a costly product. The initial investment addresses a part of the total purchase price, and the buyer will regularly apply for a loan to finance the remainder. This article will emphasize the down payment related to the home loan.

Let us start with a simple instance. A two-room loft in New Delhi may cost around INR 50 lakh at a loan fee of 7.63% each year. Assuming the lender will finance upto a maximum of 90% of the market value, the borrower will have to pay INR 5 lakh upfront as down payment. Thus, the buyer can get a maximum home loan of INR 45 lakhs.

Features and Benefits on Down Payment for Home Loan

Following are some of the features and benefits of providing a down payment when purchasing a house:

• Affordable Rate of Interest: SMFG Grihashakti offers home loans to its customers at a reasonable rate of interest to suit their budget.
• Speedy Disbursal: Applicant’s search for speedy loan delivery ends with Grihashakti.
• Ample Sanction Amount: SMFG Grihashakti provides its customers large loan amounts, based on their eligibility, to fulfill their dream of owning a house.
• Longer tenure stretch: Longer loan durations gives the borrowers sufficient time to plan their monthly EMI payments.
• Loan subsidies: Applicants can avail of home loan subsidies offered under the Pradhan Mantri Awas Yojana scheme.
• Lower monthly payments: Paying a high down payment will reduce the amount of the home loan to be paid. It results in a lower monthly EMI amount (partial principal and interest).

Benefits Of A Bigger Down Payment While Taking a Loan

A higher down payment means a better home loan interest rate, better terms and conditions, and increased chances of the applicant's loan being approved. It becomes even more crucial when the applicant has a low CIBIL score. Banks/financial institutions treat a higher down payment as an indication of the applicant’s ability to save money, thereby increasing their creditworthiness.

Apart from this, a larger down payment also means a smaller home loan amount which in turn means a lower monthly EMI amount for the borrower. It enables the borrower to pay off the home loan faster.

Advantages of a giving a high down payment

1. Lower monthly payments: Paying a high down payment will bring down the required home loan amount that one needs to borrow. It brings about a lower EMI, thus enabling the borrower to easily manage their budget.

2. Mortgage insurance avoidance: Some lenders may allow you to pay a lesser amount as insurance on the home loan if you pay a higher down payment. Please note that this will depend on the policy of the lender as well as the insurance provider.

3. Increment in the equity: An upfront down payment of 10% would imply that the buyer possesses 10% of the property, and the property is mortgaged upto 90%. Increasing the down payment will bring a positive correlation to the equity.

What if I don’t have funds for down payment?

Getting a home loan in India may be difficult if you do not have sufficient funds for downpayment. In such cases, here are some options:

• Take a personal loan to arrange the required funds. If you have financial assets, you can also consider taking a loan against securities.
• Add a co-applicant to the home loan application - a close family member with a good income and credit score.
• Pay off all existing debts. This, combined with the above step will improve your repayment capacity and the lender may consider giving you a higher loan amount.
• Consider selling off existing assets (if any).
• Select a different property or apply for a home loan after you have saved enough money for the down-payment.
• If the loan amount you need is less than INR 25 lakhs, you could consider applying for a personal loan instead of a home loan. However, do note that the personal loan amount you may be able to get will depend on many factors, including your repayment capacity.Also, these loans must be repaid within 5 years.

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