The role of down payments in home loans: How much do you need?

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.
Undeniably, availing a loan is a great tool to purchase your dream home. Having a decent down payment before applying for a home loan can significantly reduce the cost of your house.

Inversely proportional
The Reserve Bank of India allows lenders to provide 80 percent of the property’s value as a home loan which amounts above ₹30 lakh, while the buyer has to manage the remaining 20 percent from her/his own pockets.
But if you haven’t 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.
Since the principal amount on your EMIs will be reduced, they will become more affordable and manageable.

Impact on loan approval
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.

How do you save up
One of the best ways to accumulate wealth through savings is through stocks, mutual funds, and fixed income assets. These options — which some call it as 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.

What could come handy
Creating a monthly budget and identifying areas where you can cut down on unnecessary expenses could go a long way in saving up money for a particular goal — in this case, your down payment. For instance, you would want to buy some wall decor to pad up your home. In such a case, comparing the prices and quality of articles that you see online and at your local shops is likely to ensure that you don’t burn a hole in the pocket.
Another good practice for quicker loan repayments is to have options for extra income. It could be in any form — be it picking up some freelance work, part-time jobs, or side projects, besides picking the stock market route. A little side hustle could help you save enough for a rainy day.
So choose your options wisely and consider saving up enough before you take a step closer to your dream home.

The  author is CEO-Co-Founder, BASIC Home loan. Views are personal.