When a homebuyer plans to purchase a home, it is assumed that they may have saved up a particular amount to fund the purchase. However, they will likely pay for it partially from their savings or investments over the years. Most home buyers plan to apply for a home loan which shall take care of a significant portion of the financing, and the savings is explicitly channelled for a down payment. Depending on the valuation of the property, the minimum amount of down payment may vary.
Homebuyers are usually lured with the idea of paying little or nothing upfront by the sellers at the time of purchase. This concept may be appealing, but is it always the best option? Maybe not, if one is looking to take the help of a home loan. Let us understand the concept of a down payment and the advantages of a sizable down payment for a home loan.
What is a down payment?
A down payment is an initial payment or the first payment made by the buyer for a good or service taken in credit. It is an upfront partial payment made for the purchase of expensive goods or services like a home or a car. For a homebuyer to take a home loan, paying this amount becomes necessary. This is because RBI lists a guideline wherein the lender can finance a maximum of 90% of any property value of ₹30 lakhs, 80% of any property value of Rs. 30 to Rs. 75 lakhs and 75% of any property value above Rs. 75 lakhs. Thus, the minimum down payment for a home loan is 10% of the property value.
In India, banks are not allowed to lend zero down payment home loans. Thus, for getting an approved home loan, a down payment is a must.
Advantages of Making a Large Down Payment on a Home Loan
A down payment to buy a house is not a small amount. For example, if the cost of the house is ₹50 lakhs, the bank may offer a maximum of ₹40 lakhs of loan (this amount may be reduced depending on eligibility status). Thus, making a larger down payment would mean shelling out more funds. This may seem unfavourable at first, but it does have its advantages.
Reduced debt
Having a lower debt component is always welcomed. With a larger down payment, the dependency on the home loan reduces. Hence, with the lower loan amount, homebuyers would have lower EMIs which can be easily managed.
Save on the interest payable
Continuing with the above point, if one borrows a lesser loan, the interest outgo would be lesser compared to if the loan was taken for a more extensive amount. The repayment cycle for lower loans is typically shorter, thus saving on the interest payable.
Favourable terms and conditions
When a homebuyer pays a higher down payment, it generally proves that they are a low-risk borrower. Putting in more than the minimum down payment shows good financial capacity and commitment to owning the property. This resonates with favourable terms and conditions for the borrower.
Faster loan approval
A lesser loan amount with good eligibility and credit score demonstrates creditworthiness, increasing the likelihood of faster loan approval.
Increases purchasing power
When an individual pays a higher down payment, the bank or housing finance company is ready to provide a bigger loan. With this increase, one has improved purchasing power. For example, the borrower can use this loan to buy a bigger house or undertake desired renovations.
Tips to save up for a down payment on the house
Start early
Plan early and start making investments to save for a dream home. Starting early can help one build a corpus to pay for a larger down payment. If possible, cut down on unnecessary expenses till the desired financial corpus is ready.
Look for proportionate release
Some builders allow buyers to pay a down payment in instalments rather than as an upfront. This is the case, especially for under-construction properties. If one can pay for this option in parts, it would be beneficial and easier for them.
Conclusion
So, should one opt for a large down payment? The answer to this question depends solely on the individual’s financial situation and goals. If one has a good amount of savings, a large down payment is possible and quite beneficial. However, for individuals with limited savings, this option does not look feasible and may also restrict their regular budget.
Thus, before applying for a home loan, one should consider their current financial situation and goals. Then, with spare money in hand after making contingency for emergency funds, one can opt for a large down payment.
Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.
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