Margin money in home loans is the amount that a borrower pays as down payment. While buying a property, the portion of the total cost that has to be financed from the buyers’ own funds is called margin money and this may vary from 10% to 25%. This may also be paid to the bank or a non-banking finance company (NBFC) from where the prospective home buyer is seeking a home loan.
Liquidating your savings, taking a loan on savings, asking for soft loans from your company, or top-up loans from banks/NBFCs, are some of the popular choices to arrange margin money. While this helps you arrange finances in the short-term, it may have some consequences as well. For example, you run the risk of emptying your savings or if you opt for a loan against savings, the interest rates may be very high. A soft loan will impact your take-home pay for the next few months and a top-up loan is a costly affair. Thus, consider all options, before finalising the margin money source.
See also: How to arrange down-payment for your house purchase?
Importance of margin money
Margin money is a crucial aspect in the process of financing property purchase. Here is why margin money is key in such transactions:
Loan eligibility
Also known as down payment, margin money is the portion of the property price the buyer needs to pay upfront without any financing from lenders. Lenders typically finance a set percentage of the property’s value (up to 90%), requiring the buyer to pay the remaining amount. The portion of the entire price you can pay as margin money impacts the amount you can secure as loan.
Reducing loan burden
A higher down payment automatically implies a lesser amount required to be borrowed as loan. This, in turn, lowers your monthly mortgage payments and decreases the total interest paid over the life of the loan. Moreover, it also increases your creditworthiness in the eyes of lenders, ensuring lesser risk of default and more favourable loan terms.
Interest rates
Buyers who can provide a larger down payment are entitled to lower interest rates or better loan terms. This happens because a larger down payment implies a lower level of risk for the lender as you have more equity in the property upfront.
Loan approval
In some cases, lenders might put forward a mandatory eligibility criteria involving margin money. A fixed minimum amount of down payment shows your commitment to the purchase and your ability to manage the financial responsibility that comes with ownership of property.
Avoiding additional costs
Loans with a down payment of less than 20% might entail some additional costs (such as insurance costs). A higher margin money helps avoid this by making the buyer eligible for better loan terms.
Negotiation power
Having a larger margin money can strengthen your negotiating position before the seller when making an offer on the property. It significantly enhances your importance in the eyes of the seller to a serious buyer, potentially leading to a quicker acceptance of your offer.
Margin money in stock market
When used in the context of the stock market, margin money is the collateral or initial deposit required to be deposited by an investor with their broker in order to borrow funds and trade on margin. It enables investors to buy more stocks than what could have been possible with just their own funds, by borrowing from the broker. The minimum amount required to be put up by the investor to access these funds is the margin. Following are its purposes and usage:
Leverage
Borrowed funds allow investors to potentially amplify their gains and losses, as and when the stock prices rise and and fall respectively. It enables investors to leverage their investments further.
Flexibility
Should an investor be lacking the sufficient funds to fully purchase the desired amount of stock outright, it provides a flexible option to go ahead with a potentially lucrative investment. This further allows for larger positions and potential higher returns.
Short selling
Short selling occurs when investors borrow shares they don’t own solely for sale purposes, hoping to buy them back at a lower price and pocket the difference. This essential trading activity is largely facilitated by margin money.
Interest costs
Margin trading also involves interest costs on the borrowed funds, which might significantly impact overall returns. These costs are subject to the broker’s terms and the prevailing interest rates.
FAQs
Why is margin money important in property transactions?
Margin money affects your loan eligibility, reduces your loan burden, influences interest rates and loan terms and impacts additional costs associated with the loan.
How can I arrange for margin money in property purchases?
Common methods include liquidating savings, taking loans against savings or soft loans from employers, or top-up loans from banks or NBFCs.
What are the possible consequences of using loans or savings for margin money?
Using loans or savings for down payment can impact your financial stability in the short term by involving high interest rates or reducing your in-hand salary.
How does margin money influence loan approval?
A higher margin money amount demonstrates your financial capability and commitment to the purchase and can improve your chances of securing a loan.
Does margin money affect negotiation power in property deals?
A larger amount indicates your seriousness towards the deal and the financial capability of affording the property, leading to quicker acceptance of your offer.
How does margin money differ in the context of the stock market?
In the stock market, margin money refers to the initial deposit or collateral that investors must deposit with their broker to trade on margin.
Is margin money the same as down payment?
The portion of the total property cost that the buyer is required to fund from their own resources without any form of external financing from lenders is called margin money or down payment.
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