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Blog
2 mins Read | 2 Years Ago

What is Down Payment in Home Loan and How to Build Saving for it?

How much should I save for a Down Payment?

 

A down payment on a Housing Loan is the amount you pay upfront to the builder or property seller. Your down payment depends on how much of the property cost is covered by the loan amount. This is called LTV (Loan-to-Value) ratio. As per the RBI norms, the LTV ratio can go up to 75% for loan amounts above Rs 75 lakh. If you save enough to make a large down payment, it can benefit you in various ways.

Advantages of a high down payment

  • Faster loan approval: If you make a large down payment, the lender will assume that you're a good saver with high credit-worthiness. This increases your chances for a quick loan approval, once you meet the eligibility criteria.

  • Lower interest rates: A big down payment lowers the LTV ratio, i.e., the loan amount against the property value. This can help you receive a lower interest rate.

  • Lower EMIs: A higher down payment means a lower EMI amount. So, you can save cash for other financial goals.

  • Repaying the loan sooner: Lower EMIs mean more affordability and ease of loan repayment. So, you can possibly repay your home loan faster.

How to save for a Home Loan down payment?

  • Set a goal: Start thinking well in advance around what time you wish to buy a home. Research properties and compare prices for a rough idea of your likely purchase cost, considering inflation. Accordingly, you can plan to save for your future Home Loan down payment. You can go for safer options like Fixed Deposits (FDs) or Recurring Deposits (RDs).
    Alternatively, if you go for investment options like Mutual Funds, you can get higher returns. However, this option will be subject to market risks.

  • Start budgeting: Prepare a 50/30/20 budget. Allocate 50% of your spending on needs (water, electricity, rent, insurance, etc.), 30% for wants (shopping, dining, travel, etc.) and 20% for other savings/investments (like saving for a loan down payment). Stick to this budget, sincerely. Cut unnecessary spending.

  • Automate savings: Consider creating a separate Savings Account dedicated to a future Home Loan down payment. Request your bank to initiate automatic transfers from your checking account to this new account. This can ensure regular savings for your future home purchase.

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