What Is The Down Payment On A Home Loan?
A down payment is the initial installment of a greater sum. The cheap availability of housing loans in India has made home ownership more accessible. However, unlike in Western countries, where banks provide practically the whole capital to purchase a home, banks in India have tougher lending guidelines for home loans. Here is where the down payment comes into play.
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What exactly is a down payment?
According to the Oxford English Dictionary, a down payment is “a sum of money given as the first part of a larger payment.” A down payment is the initial payment for a high-value asset such as a house or a car. The down payment minimizes the amount of money borrowed.
In other words, because most consumers may not be able to purchase high-value items in a single payment, suppliers of such assets provide the opportunity to pay in multiple tranches. However, as a sign of true purpose, the buyer pays a predetermined sum in advance. The upfront payment is referred to as the down payment.
Loan-to-value-ratio norm in India
LTV is a lending risk assessment tool that banks use to determine a borrower’s eligibility before approving a mortgage. It is the mortgage amount divided by the appraised property value.
In 2010, the Reserve Bank of India (RBI) mandated that banks have a maximum loan-to-value ratio of 80% for home loans higher than Rs 20 lakh, and a maximum loan-to-value ratio of 90% for housing loans less than Rs 20 lakh. The RBI permitted a loan-to-value ratio of 90% for house loans up to Rs 30 lakh in 2015. As a result, the LTV permitted by the RBI for the affordable category is 90%. It is 80% in the other categories.
How is LTV calculated?
LTV is calculated by dividing the loan amount by the value of the property. For example, if the property is worth Rs 50 lakh and the bank lends Rs 40 lakh, the LTV will be 80%. This figure is calculated by dividing the loan amount of Rs 40 lakh by the assessed value of Rs 50 lakh. If the highest LTV allowed by the bank is 80%, the bank cannot fund more than Rs 40 lakh.
The requirement of a down payment on a house loan
Banks are permitted to offer a percentage of the property worth as a house loan under the current risk weightage guidelines. While the RBI has authorised banks to offer up to 90% of the property value in the affordable category (properties valued up to Rs 30 lakh), the maximum for other categories is fixed at 80%.
This means that if you buy a property worth Rs 30 lakh, the bank will provide you a home loan worth Rs 27 lakh, which is 90% of the purchase price.
However, you will be unable to obtain a home loan of Rs 45 lakh to purchase a property costing Rs 50 lakh.
The prescribed loan-to-value ratio in this scenario is 80%. As a result, the bank will provide you with a home loan of Rs 40 lakh.
You must arrange for the remaining Rs 10 lakh to be paid to the builder/seller. This sum is referred to as a down payment.
How should I arrange a down payment?
Given that you will need to arrange a down payment, you will need to dip into your savings. You can use the money that has collected in your fixed and recurring deposits. You can also use the funds in your provident fund. Seek further assistance from family members.
Because a down payment cannot be arranged on short notice, a buyer must carefully plan and save for a down payment.
Buyers may be tempted to take out a personal loan in order to finalise a sale quickly. However, this is best avoided because a personal loan for the down payment will raise the acquisition cost.
What is the best down payment amount for a home purchase?
According to current regulations, you must pay a set percentage of the property’s worth as a down payment.
Some lenders ask a down payment of 20-30% of the home’s purchasing price. However, many lenders provide loans with down payments as low as 5%, sometimes as low as 20%. Inquire about the lender’s down payment requirements and try to negotiate a lower down payment.
Should you, however, consider paying simply the bare minimum as a down payment? This is determined by your financial situation.
While a large down payment offers your bank greater trust, making them more eager to sanction the home loan. It also means you save money on interest because the loan amount is smaller.
However, experts recommend that you do not use all of your funds to cover the down payment because this would leave you with little liquidity for other future demands.
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