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Understanding the down payment for a home loan

Understanding the down payment for a home loan

Purchasing a house in India is more of a sentimental decision than a financial one. Beyond the brick and mortar, these structures signify a safe haven for your family – a place where you belong.

If you are planning on making this monumental purchase, it is crucial to understand every aspect of the home-buying process, including the concept of a minimum down payment for a home loan. Individuals are often confused about this part of the home loan, leaving them unaware of its influence on their overall loan terms.

For readers who are facing similar confusion, we urge you to keep reading. In this article, we dive deep into the very concept of minimum down payment for a house loan, shedding light on key factors that determine this amount and how it affects your loan.

What is a home loan down payment?

According to the mandate by the RBI, financial institutions are allowed to finance an amount of up to 80% of the property being purchased (for properties above Rs. 30 lakh). This essentially means that as a borrower, you are supposed to make an upfront payment of at least 20% of the property you wish to purchase – this is what we call a down payment for a house.

Say you are planning to purchase a house that costs Rs. 70 lakh. Upon approaching your desired financial institution, you were quoted to pay 20% of the property cost as the minimum down payment for the home. It would essentially mean that you will have to pay Rs. Rs 14 lakh upfront, while the lender will pay the remaining Rs. 56 lakh.

This down payment acts as a kind of assurance for the lending institution, as it reduces their risk exposure and also ensures that you have a stake in the property from the outset. Needless to say, this upfront payment directly affects the amount you need to borrow as well as the loan terms.

Factors affecting home loan down payment

The factors affecting the down payment for a home loan keep changing from time to time. Usually, the minimum down payment for a house ranges between 10% to 20%. However, certain factors can affect this share:

  1. Government schemes:

Specific government initiatives, like the Pradhan Mantri Awaas Yojana, can enable you to access a home loan by paying 5% to 10% of the property amount as the minimum down payment for the house.

  1. Lender policies:

Each financial institution has its guidelines and minimum down payment requirements. However, the range typically falls between 10% to 20% of the property’s value.

  1. Age:

The applicant’s age also plays a crucial role in the financing decision. A younger individual in their mid-20s with a promising career may get more affordable down payment terms than someone closer to retirement.

  1. Credit Score:

The CIBIL or credit score helps gauge your creditworthiness. A higher credit score may afford you more favorable terms and help in reducing the required down payment.

  1. Property type and location:

Usually, a high-value property or a property in high-interest areas may necessitate larger down payments.

  1. Income stability:

The stability of your occupation and past lending records determines your ability to sustain mortgage payments. A strong income source and reliable credit history can help reduce the minimum down payment for home loans.

What should be the minimum down payment for a house?

In India, the bare minimum down payment for home loans usually starts at 10% of the property’s value. However, this can vary based on the factors mentioned above. Some lenders may require you to make a down payment of up to 20% or even 25% of the property value.

However, Government-backed schemes can provide some relaxation in this matter. The Pradhan Mantri Awas Yojana, for instance, can enable you to access home loans by simply paying a sum as low as 5% of the property value.

Benefits of paying the minimum down payment for a home loan

Opting for the minimum down payment can offer several advantages:

  1. Increased savings: By not opting to pay a big chunk of the property value, you are able to preserve your savings. This adds to your financial flexibility and helps you manage unforeseen expenses.
  2. Investment opportunities: The amount saved from not paying for the whole property value can, in turn, be invested in some income-generating avenue. This can help you get high returns in the longer term.
  3. Tax benefits: By not paying the minimum down payment for home loans, you can take advantage of specific tax deductions. If the house loan is taken alone, you can claim a tax deduction up to Rs. 1.5 lakh on the interest component. However, if you have secured a joint house loan, each borrower can enjoy up to Rs. 2 lakh in tax deductions.

However, it is also essential to bear in mind that by paying the bare minimum down payment for a home loan, you will be exposed to a high loan amount. When paired with the interest rates, the final price of the house can mount up to a mammoth total.

Hence, our advice would be to have a clear understanding of the amount you will be liable to pay before you secure a home loan. A practical tool for this is a home loan EMI calculator. This tool will clarify the interest component of your loan and, thus, help you come up with a down payment amount that is more feasible.

What to do if you lack funds for the down payment on a house loan?

If you lack funds for the down payment on a house loan, here’s how to arrange a down payment:

  1. Review and strengthen your savings plan

Start by analyzing your monthly expenses and cutting down on non-essential spending. Keep these savings in a dedicated down payment fund. This way, the required amount is collected much faster.

  1. Check eligibility for government housing schemes

Government schemes such as PMAY offer subsidies. As a result, your down payment burden reduces. This benefit is especially helpful for first-time homebuyers and lower-income groups.

  1. Use eligible long-term savings wisely

You may be allowed to use provident fund balances or other long-term savings for your down payment. This can reduce the need for fresh cash without affecting your regular income flow.

How to use a down payment calculator for home loans?

A down payment calculator for a home loan helps you estimate the upfront amount you need to pay when applying for a home loan. To use it, you need to enter the property value, the lender’s Loan-To-Value (LTV) ratio, and your preferred loan amount. The calculator instantly shows the minimum down payment required. It also displays the approximate loan size. 

You can adjust the property price or loan percentage to see how changes affect your upfront cost. This helps you plan your savings better. A home loan DP calculator also allows you to compare different scenarios.

Tips to save for your home loan down payment 

Paying the upfront cost of a property becomes easier if you know how to save for the down payment. Some of the wisest down payment saving tips are as follows:

  1. Set a clear savings goal

Start by estimating the total down payment amount and setting a realistic target. If you have a target, it helps you stay focused and track progress more effectively.

  1. Keep the down payment account separate

Create a separate savings account in which you keep money only for your down payment. Don’t use it for regular expenses. This reduces the urge to spend and builds financial discipline over time.

  1. Invest in low-risk instruments

Another way to save money for the down payment is by utilizing safer investment instruments. They help in growing your savings steadily. At the same time, they let your money remain accessible.

Conclusion

Having an idea about the minimum down payment for a home loan helps you make an informed decision about your home loan management. You can either opt to pay the minimum required sum and save taxes, or you can put up a substantial amount and reduce your interest component.

Regardless of the choices you make, it is essential that you finance your home loan from an entity that offers flexibility and attractive interest rates. We recommend securing a home loan from Tata Capital. Renowned for robust customer service and competitive home loan interest rates, Tata Capital is the perfect partner to finance your dream home.Visit the Tata Capital website or download the Tata Capital home loan App to apply for a home loan today!

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FAQs

What is the minimum down payment required for a home loan in India?

 

In India, lenders usually require a minimum down payment of 10% to 20% of the property value. This can vary depending on your profile, the property's cost, and RBI guidelines.

Is a down payment mandatory for a home loan?

 

Yes, a down payment is mandatory for most home loans. RBI regulations require borrowers to contribute a portion of the property value. This is to ensure shared risk and responsible borrowing between the lender and the homebuyer.

Can I get a home loan without a down payment?

 

It is usually not possible to get a home loan without a down payment. Some lenders may offer higher loan-to-value ratios, which reduces the down payment, but it cannot be eliminated. 

Which government schemes offer a low down payment on home loans?

 

Government schemes such as Pradhan Mantri Awas Yojana (PMAY) offer interest subsidies. This makes the down payment on a home low. As a result, home ownership becomes more affordable for eligible buyers.

Can I take a loan for the down payment on a house?

 

It is not recommended to take a separate personal loan for the down payment of a house. A personal loan increases overall debt and the monthly EMI payout. It may also reduce your home loan eligibility due to higher financial obligations.

How does the down payment affect home loan EMI and interest rates?

 

A higher down payment reduces the loan amount, leading to lower EMIs and overall interest outgo. It may also help you secure better loan terms, as lenders view borrowers with higher upfront contributions as lower risk.

How to calculate the down payment for a home loan?

 

To calculate the down payment for a house, subtract the approved home loan amount from the property’s total value. You can also use online down payment calculators to quickly estimate the required upfront amount based on loan eligibility.

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