Tips for making the down payment for a house

Thanks to the growth of housing finance in India, you do not have to wait till you have accumulated enough money, to buy a house. You can pay a certain percentage of the property’s value, known as ‘down payment’ and buy the property with the help of a home loan taken for the remaining amount.

Borrowers often have many questions about the equity they have to pay as down payment, in the purchase of a house. Here, we try to answer some of the most commonly asked questions about home purchase down payment.

How much do I have to pay as down payment?

By and large, banks offer 80% of the property’s value as home loan. The buyer has to arrange the remaining 20% from his own pocket.

What is the minimum limit on down payment?

In some cases, banks might offer 90% of the property as home loan and the buyer has to arrange only 10% of the money as down payment. However, this happens only when:

• Your take-home salary is higher than the amount you will have to pay as EMI.
• Your credit score is really good.
• You are an old customer, with an impressive track record.
• You are buying a home in a project approved by the bank.
• You are able to negotiate a good deal.

How should I arrange down payment?

The capital saved up in your recurring and fixed deposit accounts, could be used for this purpose. In case there are no savings, you could borrow this money from a family member, a relative or a friend, as you may be able to avoid paying any interest that way.

However, a borrower who is not able to get any assistance on this front, can take a loan against his life insurance policy or his automobile. He may also apply for a personal loan, to make this payment.

Benefits of making a large down payment

Should I put more than 20% down payment on a house?

If your savings allow you to pay more than the minimum down payment, you should do so by all means to make several gains.

Lower EMI burden

Needless to say, the lower the loan amount, the lower the monthly installment you pay against it. This means you may not have to make drastic changes in your monthly financial planning, in order to live comfortably, after the deduction of the EMI amount from your bank account.

You pay less as interest

Although home loans are much cheaper than most other forms of debt, a borrower has to typically pay interest that is equal to or sometimes slightly more than the principal amount. The lower the principal, the lower is the interest.

Banks will be more forthcoming in lending

The fact that the buyer has a substantial amount to pay as down payment, reflects his solid financial standing. To such a borrower, the bank would not only be quick to approve the loan application, but might also offer a slightly lower rate of interest.

You do not have to buy a home loan insurance

In case the housing loan amount is reasonably low and the repayment tenure comparatively short, you do not have to buy a home loan insurance product, along with the home loan. When the home loan tenure is long and the borrowed capital is large, buyers have to buy a home loan insurance (not to be confused with home insurance) at the time of availing of the loan.

You can easily borrow for your future needs

As you have not used all your credit eligibility to secure a housing loan by virtue of making a substantial down payment, you will be able to apply for other loans in future, if need be. This is particularly useful for those raising a family or those who would like to invest in multiple properties. Additionally, as you own a large part of equity in the house, you could also get a loan against property.

See also: How is a loan against property different from a home loan

Benefits of small down payment

Small down payments also have their own benefits. Even if you pay the bare minimum amount as down payment, you get to become the owner of a property early in life.

Your will need money for the house

If you spend all your savings in purchasing the home, you may not have any ready money to make additions, repairs or renovations to your new home. Even if the house is new, you may need to spend some money to make it liveable.

You have liquid cash

As you have not dried up all your liquidity in purchasing a property, you will have savings left, to help in your routine life. This need is felt particularly at a time of emergency. For example, during the present Coronavirus crisis and its effect on the economy, buyers who do not have emergency funds, will have to depend on their bank’s moratorium scheme.

You can invest your money in other high-yield assets

Putting all your money in one asset is never a wise idea. You could use your additional liquidity in market instruments that help you earn higher interest. That way, you could ultimately be able to repay your home loan faster.

What is a good amount to put down on a house?

There are no rules about what is actually a good or bad amount. A buyer should not be in a spot where he has to take on debt, to arrange the down payment. At the same time, one should not use up all savings, to make the down payment. A down payment in the range of 30-40% could be good, if your finances allow it.

See also: Rules for PF withdrawal for house purchase

FAQs