What is Down Payment?

21 June, 2023      Home Loans

In simple terms, a down payment is an initial payment you make when buying something expensive,

such as home or property which demonstrates your commitment, helps reduce the loan amount, and gives the lender confidence in your ability to handle the purchase.

For example: You want to purchase a house for Rs 25,00,000. You would make a down payment of 20% or Rs. 25,00,000 * 0.2 = Rs 5,00,000. The bank would sanction the home loan of Rs 20,00,000.

Why down payment matters?

Down payments is important for following reasons:

1. Reduce Loan Amount: One of the primary benefits of making a down payment is that it reduces the amount of money you need to borrow. Therefore, you decrease the loan amount required to finance your purchase.
2. Lower Interest Rates: Lenders often consider down payments when determining the interest rates for loans. In general, a larger down payment indicates lower risk for the lender, as you have more equity in the purchase.
3. Enhanced Loan Terms and Equity Position: When you make a down payment, you improve your loan terms and position. With a lower loan amount, you may qualify for better repayment options, such as lower EMI’s. Additionally, a larger down payment increases your equity in the property or asset, which means you own a larger share of it from the start.

How much down payment is mandatory for home loan?

As per the eligibility criteria, most of the lenders demand borrowers to pay a minimum portion of the loan amount upfront, which is also called home loan down payment. Therefore, the minimum amount will be the 10% of the total loan amount for a down payment of a home loan.

Read more: Multiple Home Loans: Can you have more than one?

How to save for a Down payment?

When it comes to saving for a down payment, it's important to create a budget, set savings goals, and find ways to reduce expenses. Increasing income through additional sources can also accelerate savings. By following these practical tips, individuals can work towards their down payment goals and take steps towards achieving their desired purchases.

Down payments can influence interest rates, with larger down payments often leading to lower rates. Additionally, making a down payment improves loan terms and equity position, providing more financial security and potential opportunities for future borrowing or refinancing.

Ultimately, understanding the significance of down payments and implementing effective saving strategies can empower individuals to make sound financial decisions, secure better loan terms, and move closer to their homeownership or major purchase goals.