Buying a home is not an easy task these days, especially, with the recent rise in home loan rates. Enhanced home loan rates translate to higher equated monthly installments (EMIs) or the obligation to opt for a prolonged loan tenure. To escape the burden of having to pay so much interest on the loans sought, it serves best to make a decent down payment before applying for a home loan.
The Reserve Bank of India (RBI) imposes a limit on the maximum home loan amount that a lender can extend to a borrower, capping it at 80 per cent of the property’s value. This percentage is commonly referred to as the ‘loan-to-value ratio’ (LTV). The remaining 20 per cent of the property’s value is the responsibility of the borrower as a down payment.
However, some exceptions exist to the 80 per cent LTV rule. Certain borrowers, such as armed forces personnel or government employees, may have the possibility of securing a loan with a higher LTV. Additionally, borrowers with excellent credit scores may find lenders willing to offer 85 per cent LTV loans.
The 80 per cent LTV rule serves a dual purpose: Safeguarding borrowers from overextending their financial commitments and providing lenders with adequate collateral in the event of a borrower default. For those contemplating a home purchase, it’s essential to consider the down payment requirement as a vital component when crafting a budget for the transaction.
Increased down payment translates to lower interest outgo
A larger down payment can have a multi-fold impact on reducing the overall cost of your home.
One, it diminishes the sum you must borrow from the lender, consequently leading to lower monthly mortgage payments. This reduction occurs because you will be paying less interest over the duration of the loan. Consider this scenario: If your house has a price tag of ₹50 lakh and you make a down payment of ₹25 lakh, your loan would amount to just ₹25 lakh. This translates to reduced EMIs, faster loan repayment, and substantial savings on the additional interest that would have accrued if you had opted for the minimum down payment and borrowed the remaining amount.
Second, it enhances your appeal as a borrower to lenders. By reducing your debt and increasing your home equity, you minimize the risk of loan default. This is due to the fact that when you exceed the minimum required down payment, you showcase solid financial capacity and a dedicated commitment to the property purchase. This establishment of financial stability instills confidence in lenders regarding your ability to repay the loan. Consequently, lenders may be inclined to offer you a lower interest rate on your mortgage, further decreasing your monthly financial commitments.
Having more financial resources can result in financial institutions being more willing to extend larger loans to you. Consequently, when you make a down payment that surpasses the minimum required for a home loan, your lender might consider offering you a greater loan amount. This elevated borrowing capacity enhances your ability to make substantial property acquisitions and explore an array of options. For instance, you can comfortably consider more expensive homes or embark on significant renovations for the property you are purchasing without being constrained by budget limitations.
Borrowers must consider the following additional points concerning down payments:
- The specific down payment requirement can vary based on the lender and the type of loan you are pursuing.
- For individuals with good credit or those embarking on their first home purchase, some lenders may offer loans with lower down payment options.
While loan prepayment helps to bring down the EMIs or loan tenure, opting for a lump sum down payment ensures that the burden of the loan is much lessened, thus, enabling easier loan repayment and lesser interest outgo.