How much down payment can you make for your property?

Planning finances is the most crucial aspect of a property purchase. Most homebuyers opt for home loans that offer them several benefits, such as tax deductions and the flexibility of repaying the loans through EMIs. One should note that banks and financial institutions finance only up to 80% of the property cost, according to the guidelines of the Reserve Bank of India (RBI). The buyer must pay the remaining 20% to complete the transaction. This highlights the need to ensure the right budget estimate for property purchase to avoid any burden on one’s savings. In this guide, we will discuss how much down payment a buyer can make during a property purchase. 

What is down payment in property purchase?

Down payment refers to the sum of money that a buyer must pay upfront during the purchase of a property. It is calculated as a specified percentage of the total purchase cost of the property. Typically, the remaining amount is financed through a loan. 

How does a down payment work?

In simple words, a down payment refers to the money a property buyer has to pay from their pocket. For example, if a buyer wants to purchase a property worth Rs 75 lakh. If the buyer has a good credit score and meets all the requirements, they will be a loan covering 80% of the property cost. That is, they can get a loan for Rs 60 lakh. The remaining amount, which is 20% of the property cost, must be paid by the buyer. The down payment amount will be Rs 15 lakh. 

Importance of down payments in property purchase

Down payments are crucial components to consider when estimating expenses during a property purchase. In India, a home buyer must pay at least 20% of the property value. They can obtain home loans to finance the remaining amount. We discuss some of the benefits of down payments made during property purchase.

Downpayments reduce the home loan burden for buyers

Down payments help significantly reduce the funds a potential buyer owes to a lender, the amount of interest paid during the loan tenure and monthly EMIs. The higher the downpayment, the lesser the amount a buyer will have to borrow to complete the property transaction. 

Let us take an example. Mr Kumar plans to purchase a property worth Rs 60 lakh. The downpayment he must pay is 20%, which is Rs 12 lakh. Let us assume he applies for a loan for the remaining amount, Rs 48 lakh, at an interest rate of 8.85% for 10 years. The EMI calculated is around Rs 60,000. 

However, if Mr Kumar decides to increase the down payment to 30% of the property cost, which is Rs 18 lakh. He will only have to get a loan of Rs 42 lakh. In this case, the monthly EMI is around Rs 52,000. Thus, increasing the down payment significantly reduces the monthly EMIs for a potential home buyer. 

Down payments serve as a guarantee 

Further, down payments serve as a guarantee in most cases. A buyer can secure the property deal by paying a down payment. This way, the seller will refrain from engaging with another interested purchaser for the same property. Hence, it reduces the risk of losing out on the property deal. 

Factors to consider when deciding the down payment for property purchase

Consider the savings and liquid assets

Since a buyer must pay 20% of the property cost upfront, the funds must be sourced through savings or other investments. So, one must look at their savings. Fixed deposits and recurring deposits are widely preferred and traditional investment options for people in India. If you have a co-applicant buying the property along with you, like your spouse, you can combine your resources to generate funds. 

Assess income and cash reserves 

While looking at savings and investments to make the initial purchase, it is crucial to consider one’s monthly income and cash reserves to meet household expenses. According to experts, one can follow the 50/30/20 rule. That is, allocate 50% of the income to essential expenses such as rent, utilities, insurance, etc., keep 30% of the income for spending on shopping, dining, travel, etc., and allocate 20% for savings and investments. 

Estimate future financial obligations

When calculating the budget for a house purchase, it is crucial to set aside funds for a down payment. At the same time, it is equally important to consider any future financial obligations that could arise. One also needs to consider saving for the emergency fund.  

Evaluate debt-to-income ratio

The borrower’s debt-to-income ratio is a key metric used by lending institutions when processing loan applications. The debt-to-income ratio compares one’s monthly debt to gross income. A lower debt-to-income ratio increases the chances of a person obtaining a higher loan amount. This way, the down payment will be kept to a minimum amount.  

Check the credit score 

Banks and financial institutions consider the applicant’s credit score when processing home loan applications. To improve one’s credit score, one must ensure the timely payment of credit card bill dues and existing loans to avoid any extra charges.

Value of the property

The higher the value of the property, the higher the down payment one has to pay. This is a crucial point to keep in mind when calculating the budget for a house purchase. Hence, one should set a realistic budget to ensure an affordable property deal, without burdening one’s savings. 

Financial planning tips to save for down payment for property purchase

• Reduce unnecessary expenses: Potential home loan borrowers should plan for the increased expenses they would incur in the future in the form of regular EMI payments. Hence, it is prudent to start saving and avoid unnecessary expenditure. Experts recommend keeping a margin of three months’ EMI as a reserve.  
• Invest in savings plans: Even before one decides to purchase a house, it is better to save money in a suitable investment plan. This will help build a significant corpus for down payments. The higher the savings, the more down payment one can afford. 
• Automate savings: Creating a dedicated savings account for home loan down payments is an excellent idea. Check with the bank if there is a facility to set automatic transfers from the person’s primary checking account to this savings account.
• Explore additional income sources: One can even consider additional income sources such as part-time work or selling unused assets. This can help one protect their hard-earned savings and manage future EMIs better. 
• Consider other costs: Homebuyers need to consider the hidden costs involved in property purchase. These include taxes such as GST and stamp duty and registration charges, brokerage fee, maintenance costs, etc. This can significantly impact their overall expenditure. 

Alternate ways to arrange down payment for house purchase

For most people, it is convenient to use one’s savings to make down payments for property purchases. However, there are other ways to source funds as discussed below:

• Borrowing from family members: One can reach out to their family members for financial help. One can decide if they want to take this amount as a debt and plan to return it in future. 
• Taking a personal loan: Personal loans are unsecured loans and hence this option may not be very beneficial as they will cost more than other types of loans. One may have to pay around 11%-20% interest on personal loans. 

See also: How to arrange down-payment for your house purchase?

Factors banks take into account when processing loans

Besides factors such as the home loan applicant’s income details and other basic details, lenders usually consider these important points when approving loans. This will help determine the minimum limit on the down payments.

• Applicant’s credit score
• Debt-to-income ratio
• Take-home salary, whether it is higher than the amount to be paid as EMI
• Old customer with an excellent track record
• Property purchase in a project approved by the bank
• Type of property

Benefits of paying a smaller down payment 

• Availability of liquid cash: Smaller down payments will enable the home buyer to keep significant liquid cash. This surplus can be invested into other investments, which will help them grow their wealth. 
• Affordability: A smaller home loan down payment can make the house purchase more affordable, reducing the immediate need to shell out huge sums of money. 
• Protection of savings and investments: By choosing a small down payment amount, a home buyer can save their hard-earned savings. They will not have to liquidate their investments or other assets to gather funds for the upfront payment. This will enable them to ensure better financial planning and save more for their future EMIs.

Benefits of paying a higher down payment 

• Reduced EMI burden: A higher down payment will imply a lower loan amount. This way, the monthly EMIs will be lesser, creating less impact on one’s income.
• Lesser interest payment: A home loan borrower must pay interest equal to or slightly higher than the principal amount. The lower the principal, the lower the interest when one decides to go for a higher down payment and reduced loan amount.
• Reduced interest rates: A larger down payment will mean a lower Loan-to-Value (LTV) ratio. If the LTV ratio is lower, the loan amount tends to be a small percentage of the property’s value. This is an indication of low risk for lenders, who are likely to offer attractive interest rates to borrowers. This way, one can reduce their home loan costs. 
• Seamless loan processing: A higher down payment is a reflection of the borrower’s strong financial position and creditworthiness, which gives a positive signal to lenders. This increases chances of quick loan approval if the eligibility criteria are met. 
• Faster loan repayments: A high downpayment and lower EMIs will be more affordable for the homebuyer who can now ensure to repay the home loan quickly and ensure financial savings. 

Can you take a loan to pay the down payment?

Downpayments are often referred to as out-of-pocket payments. In India, most banks and financial institutions do not allow the borrower to take a loan to pay the down payment. The home buyer must finance this payment through their savings or other investments. However, many potential buyers opt for unsecured, collateral-free loan through some financial institutions and they can secure these loans if they have a good credit score.

Housing.com News Viewpoint

There are several factors that one should consider when determining how much downpayment they can afford for the house purchase. While on their part, a home buyer can start saving early and look to liquidate their investments to generate funds. However, potential loan applicants should understand that there are some factors lenders will consider when determining the loan amount. One can consult a financial expert for estimating the budget and planning for a property purchase. 

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