A down payment is a percentage of a credit purchase that is paid in cash before the EMIs of a loan amount start. Down payment is not only an indication of good faith that the purchaser intends to follow, but it also minimises the risk for the seller.
Majority homebuyers in India are dependent on home loans for buying a property, and down payment is an indispensable part of a home loan. The size and the mode of accruing the down payment depend on financial circumstances and preferences. The down payment represents the difference between the cost of the property and the loan amount approved by your lender. Down payment amount is generally 10-25 per cent of the total cost of a property, depending on the amount of loan that has been sanctioned. During disbursement, once the property is verified, a legal report is submitted on the sale deed of the property, contribution receipt and property documents. The personal contribution has to be made by the buyer before the loan is disbursed. For example, the owner’s contribution is as low as 10 per cent in case of a home loan of Rs 30 lakh or below. For home loans over Rs 30 lakh, the bank will fund up to 80 per cent of the market value of the property (the percentage value may be higher in deserving cases.)
After making your down payment, the remaining loan balance can be paid back with-
- Ongoing periodic payments (Such as monthly installments)
- Additional lump sum payments, if the owner chooses to proceed with voluntary payments to reduce debt or pay the loan off early
- In some cases, a balloon payment is made. It means a significant amount due at the end of a balloon loan, such as a mortgage, commercial loan or amortized loan
Most lenders prefer higher down payments. Though lenders may specify a minimum amount for down payment, an owner may opt to stick to the minimum or make a more substantial down payment if they can afford it. Opting for a higher down payment significantly increases the chances of getting the loan approved and earning a better mortgage interest rate. There are other benefits, too –
- The owner owns larger equity in the property and thus, lowers his dependence on the borrowed funds
- A lower loan amount may fetch the owner a lower interest rate since it generally varies for different loan slabs. For example, a Rs 20 lakh loan may attract a lower interest rate in comparison to a loan amount of Rs 30 lakh. Interest rates also depend on the lender’s policies
- A smaller loan amount offers greater comfort to the lending institution and thus, enhances the chances of quicker loan approval.
- This leads to cost saving as processing fees, and home loan insurance premium depends on the loan amount
Thus, one must be careful while deciding on the amount of down payment. While it must not become a financial burden, one must also try to minimise the loan amount.