Home Loan: How Much Down Payment Do You Need To Pay?

Down Payment For Home Loan, Home Loan EMIs: Owning a home in India is a cherished dream for many. But, with soaring real estate prices and the requirement for financial assistance to run your household, fulfilling this dream without a home loan becomes difficult. Availing a loan is a convenient tool to purchase your dream home. Experts said having a decent down payment before applying for a home loan can significantly reduce the cost of your house.

The Reserve Bank of India allows lenders to provide 80 per cent of the property’s value as a home loan which amounts above Rs 30 lakh, while the buyer has to manage the remaining 20 per cent from her/ his own pockets.

Atul Monga, chief executive officer and co-founder of BASIC Home Loan, said, “If you have not paid much of a down payment, and the price of your property falls below the outstanding loan balance, you may not be able to sell the property. Having a larger down payment will lessen the possibility of a negative equity situation.”

The larger the down payment, the lower the property’s cost. In other words, with a larger down payment, you only have to take a smaller loan from the lender, resulting in lower interest payments over the loan tenure, he added.

Monga also said that as the principal amount on your EMIs (equated-monthly instalments) will be reduced, they will become more affordable and manageable.

Sharing his experience, Nikhil Gangil, the founder of Intrinsic Value Equity Advisors, said in a post on X, “Word of advice guys, PREPAY as much as you can.”

Giving his own example, he said his home loan tenure went down from 360 months to 121 months after infusing only 36 extra EMIs as principal prepayment. “Basically, I just saved 203 months worth of interest.”

He said his loan was 240 months which he took during COVID-19 times. The interest rate was 6.85 per cent, which went up to 9.35 per cent as the RBI hiked repo. Instead of increasing the EMI amount, the bank went for increasing the tenure. So, the tenure came near to 370 months.

This is when he decided to prepay. He saved and paid 20 EMIs and then 16 EMIs in 5-month intervals. “Now, with marginally increased EMI, my tenure stands at 121 months. This predominantly happened because I am in my first 3 years of loan when banks recover about 75 per cent interest,” Gangil said.

“And 25 per cent as principal in every EMI. This is how loans work. For first 5-7 yrs, they take as much interest as they can, so that even after 7 years you prepay all your loan, it won’t make any diff to their earnings,” he shared in the post.

“So, since I am only paying 25 per cent as principal. When I prepaid 36 EMIs. It got deducted directly from the principal. Thus having a huge effect on my tenure,” Gangil said.

Impact on Loan Approval

BASIC Home Loan’s Atul Monga said, “Making a substantial down payment while purchasing a home can strengthen your prospects of loan approval. A substantial down payment demonstrates your financial discipline and responsibility, resulting in the lender pursuing you as a less risky client who has a strong commitment to repay the loan.”

Not only can it have a positive impression on the lender, but they can also offer you a loan on favourable terms such as lower interest rates, he added.

Savings Instruments For Individuals

One of the best ways to accumulate wealth through savings is through stocks, mutual funds, and fixed-income assets. These options — which some call smart investing — can offer you attractive returns. But, as everything comes with its own risks, it is always advisable to consult a qualified financial advisor before you take the leap.

Short-term fixed deposit is another way to go about accumulating savings. It provides you with a secure and steady growth of money, and since it has a higher interest rate than your regular savings accounts, such FDs are considered a good option for people with a lower risk tolerance.

The Central government also runs a lot of small savings schemes such as public provident fund, national savings certificate, and Sukanya Samridhi Yojana. These are also good options for saving tax while filing your ITRs. They have competitive interest rates, and with the government’s involvement, these are considered safe options to park your money.