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 RBI, financial institutions are allowed to finance an amount of up to 80% of the property being purchased (for properties above 30 lakhs). 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 home loan down payment.
Say you are planning to purchase a house that costs Rs. 70 Lakhs. 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 Lakhs upfront, while the lender will pay the remaining Rs 56 Lakhs.
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 keep changing from time to time. Usually, the minimum down payment for home loans range 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 only putting up 5% to 10% of the property amount as the minimum down payment for the house.
2. 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.
3. 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.
4. Credit Score:
The Cibili or credit score helps gauge your creditworthiness. A higher credit score may afford you more favourable terms and help in reducing the required down payment.
5. Property type and location:
Usually, a high-value property or a property in high-interest areas may necessitate larger down payments.
6. Income stability:
The stability of your occupation and past lending records determine your ability to sustain mortgage payments. A strong income source and reliable credit history can help reduce the minimum down payment for home loans.
How much 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 Lakhs on the interest component. However, if you have secured a joint house loan, each borrower can enjoy up to Rs. 2 Lakhs in tax deductions.
However, it is also essential to bear in mind that by paying the bare minimum down payment for 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.
To sum up
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 App to apply for a home loan today!
11 March 2024
6 mins read
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