With the rise in employment opportunities and an increase in the propensity to spend, a large number of people aspire to own their homes. Home loans are the conduit to achieve this aspiration. It is a great way to finance the purchase of a new home without putting a strain on the savings.
Getting a loan in the contemporary financial landscape is convenient, given the technological developments in the space. However, you need to meet the eligibility criteria set by the lending institutions to get the desired loan amount. Since home loans are high-value loans, the risk associated with lending money to borrowers is also high.
To reduce the risk of default, lending institutions ask borrowers to deposit a down payment amount.
Read on to learn about home loan down payments.
What is a down payment in the case of home loans?
The home loan down payment refers to a lump sum amount paid upfront by the borrower to finance the purchase. Depending on the borrower’s credit profile and the lending institution’s policies, it can vary from 10% to 25% of the property’s current value. For example, let us assume the property’s present value to be INR 80,00,000; the borrower will have to pay between INR 8,00,000 to INR 20,00,000 as a down payment. A higher down payment amount will reduce the lending institution’s risk and help borrowers avail of better terms on the home loan.
How to make a down payment for a house?
The down payment amount for a home loan is substantial and can be a challenge for many people to arrange. However, making the downpayment has a lot of benefits for borrowers. Let us take a quick look at some effective tips to make a down payment for your house.
Start saving early
Most people are not habituated to saving money in a planned manner. If you want to buy your dream house, the approach needs to be changed. It is advisable to arrange funds for a home loan down payment by building a corpus for it. Opening a savings account and depositing funds from the beginning of your professional career is ideal. It will compound the amount, and you will have a significant amount saved by the time you want to own a house. Investing some portion of the saved funds in high-return financial assets is also highly recommended. Booking profits and transferring the gains to an FD account is also a smart way to save money for a home loan down payment.
Dig into the provident fund account
The Employee Provident Fund Organisation has a flexible policy that allows employees to withdraw some percentage of their provident fund money to buy a house. In addition, PF account holders can get a loan up to 36 times their monthly income for property purchases. However, taking a loan against your PF account can be a time-consuming process and involves a lot of documentation. Also, you need to inform your employer about this withdrawal beforehand for a smooth transition.
A loan against an insurance policy
Another option to arrange the required down payment funds is by taking a loan against an insurance policy owned. Insurance policyholders are eligible for a loan amount up to 90% of the surrender value of the insurance. Surrender value is the amount a policyholder gets when they voluntarily end an insurance plan. For example, if you have insurance coverage of around INR 20,00,000 and the surrender value at the time of voluntary termination is around 10,00,000, you can get a loan amount up to INR 9,00,000. It can vary depending on the policies of your insurance company.
Proportionate release option
The proportionate release option is a feature offered by some lending institutions to their customers that allows them to make the down payment in small portions over a given time frame. It is important to note that this feature applies to construction projects of some selected developers. This option eliminates the need to make a high lump sum down payment to avail of a home loan. Before considering this option, you must research the developers in the area you want to buy a property. Using a Grihashakti’s EMI calculator, lending institutions can help you calculate the instalments for the down payment amount instantly.
Take a Personal Loan
If you have sufficient repayment capacity and a high credit score (higher than 750), you can also consider taking a personal loan to manage any insufficiency with regards to the down payment amount. Please do note however, that since personal loans are unsecured, the interest rates are much higher. Moreover, taking a personal loan before the home loan sanction will cause your home loan lender to impose a higher interest rate and vice versa.
Benefits of making a high down payment
There are plenty of benefits associated with making a high down payment for home loans. Let us take a quick look into some prominent advantages.
- A higher down payment amount makes borrowers eligible for lower interest rates and better loan terms.
- A lower interest rate and principal borrowed amount naturally help reduce monthly instalments, and one can consider repaying the loan sooner.