What is down payment on home loans?

The easy availability of housing loans in India has made property ownership easy. However, unlike Western countries, where banks offer nearly the entire capital to buy a home, banks in India have stricter norms for home loan amounts. This is where the down payment comes into the picture.

See also: How to qualify for a home loan?

 

What is a down payment?

The Oxford English Dictionary defines down payment as ‘a sum of money that is given as the first part of a larger payment’. A down payment can be termed as the initial payment for a high-value asset, such as a house or a vehicle. The down payment reduces the amount of borrowed money.

In other words, since the purchase of high-value assets may not be possible for most consumers in one payment, sellers of such assets offer the option to make the payment in several tranches. However, as a show of genuine intent, the buyer pays a specific amount in advance. This advance payment is known as the down payment.

 

Loan-to-value-ratio norm in India

Loan-to-value (LTV) is the lending risk assessment tool used by banks to examine the borrower’s eligibility before approving the mortgage. It is the ratio of the mortgage amount to the appraised property value.

In 2010, the Reserve Bank of India (RBI) stipulated that banks should have an upper limit of a loan-to-value ratio of 80% for housing loans greater than Rs 20 lakh, and an upper limit of 90% for housing loans lower than Rs 20 lakh. In 2015, the RBI allowed a loan-to-value ratio of 90% for housing loans up to Rs 30 lakh. Thus, the RBI-approved LTV for the affordable category is 90%. For other categories, it is 80%.

 

How is LTV calculated?

LTV is derived by dividing the loan amount by the property value. For example, if the property value is Rs 50 lakh and the bank sanctions a loan of Rs 40 lakh, the LTV will be 80%. We arrive at this number by dividing the loan amount of Rs 40 lakh by the appraised property value of Rs 50 lakh. The bank cannot fund more than Rs 40 lakh if the maximum LTV as per the bank’s norm is 80%.

 

The need for a down payment on a home loan

Under the existing risk weightage norms, banks are allowed to offer a certain portion of the property value as a home loan. While the RBI has allowed banks to offer 90% of the property value for the affordable category (properties worth up to Rs 30 lakh), the limit is set as 80% for other categories.

This means that if you are buying a property worth Rs 30 lakh, the bank will issue you a home loan worth Rs 27 lakh, which amounts to 90% of Rs 30 lakh.

However, you will not be able to get a home loan worth Rs 45 lakh to buy a property worth Rs 50 lakh.

In this case, the prescribed loan-to-value ratio is 80%. Hence, the bank will offer you Rs 40 lakh as a home loan.

You will have to arrange the remaining Rs 10 lakh to pay to the builder/seller. This amount is known as a down payment.

 

How should I arrange a down payment?

Considering you will have to arrange the down payment, you will have to dig into your savings. The money accumulated in your fixed deposits and recurring deposits can be used. You can also use the money accumulated in your provident fund. You can check with family members for further assistance.

Since the down payment cannot be arranged at short notice, a buyer must thoroughly plan and save for making a down payment.

Sometimes, in a hurry to close a deal, buyers get tempted to take a personal loan. However, this is best avoided because a personal loan to make the down payment would increase the cost of acquisition.

 

What is the ideal amount to pay as a down payment for a home purchase?

According to the existing norms, you have to pay a certain portion of the property value as a down payment.

“Some lenders require 20/30% of the home’s purchase price as a down payment. However, many lenders offer loans that require less than 20/30% down payment, sometimes as little as 5%. Ask about the lender’s requirements for a down payment and negotiate to reduce the down payments,” says the RBI.

But should you consider paying only the basic minimum amount as the down payment? This depends on your financial condition.

While a large down payment gives more confidence to your bank, making them more willing to sanction the home loan, it means you save up on the interest since the loan amount is smaller.

However, experts advise against using all your savings to make the down payment since this leaves you with no liquidity for other future needs.

 

FAQs

How much money can I get as a home loan in India?

A borrower can get a maximum of 90% of the property value as a home loan in India.

How much down payment will I have to provide to get a home loan?

The buyer is expected to arrange at least 10% of the property cost as a down payment under the existing norms.

Is it better to pay a larger down payment?

In case your savings allow, pay more than the minimum down payment. Doing so makes monetary sense since you will save more in the long term.

What is an example of a house down payment?

If you are buying a property worth Rs 30 lakh, your bank will issue you a home loan worth Rs 27 lakh, which amounts to 90% of Rs 30 lakh. The loan-to-value ratio for properties worth more than Rs 30 lakh is 80%. Therefore, the bank will offer a maximum of Rs 40 lakh as a home loan, if you buy a property worth Rs 50 lakh.

Is the down payment and EMI the same?

No, a down payment is an upfront payment made to purchase a property. EMI is the monthly instalment you pay to the bank to repay the home loan.

Can I get a home loan without a down payment?

No, you have to pay a certain value of the property as a down payment. A 100% home loan is not allowed in India.

What will be the down payment if I take a SBI home loan?

According to the SBI portal, they pay around 75-85% of the property cost. The remaining 15-25% of the amount is paid as a down payment.

What is LTV?

The loan-to-value (LTV) ratio is one of the tools that banks use to lower their risk exposure. In terms of percentage, the LTV ratio is arrived at by dividing the loan amount by the property value.

How is the LTV calculated?

The LTV ratio can be calculated by dividing the loan by the property purchase price and using the below-mentioned formula:

LTV ratio = Borrowed amount/Property value x 100

For example, Ankit Kumar is buying a house worth Rs 50 lakh. A bank that is willing to offer a home loan of Rs 40 lakh has an LTV ratio of 80%, while a bank that agrees to lend Rs 45 lakh has an LTV ratio of 90%.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at [email protected]