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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.

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.

Getting a good down payment

S.NO. Checklist for the reader
1 Use a tax-free savings account for the down payment
2 Saving a fixed amount every month (Snowball effect)
3 Enroll for the first-time home buyer’s program (if applicable)
4 Borrow from family and relatives with less interest.

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