It would be apt to call buying a house “the Indian dream”. It is a mark of stability and stature. But there are many challenges in buying a house, financing being the biggest. While most individuals can’t buy a house with full cash up front, some believe making a large down payment to be a smart move. Why? To reduce their debt burden.
Housing loans only cover 75-90% of your chosen property’s value, so you have to put forth the rest, not to mention the additional registration charges, stamp duties, etc. But is it wise to make a larger home loan down payment? Let’s find out.
Pros of making a larger down payment
1. Lesser loan load
When you put down a larger down payment, your loan amount naturally reduces. This means lower EMIs throughout the loan tenure and comfortable repayment. Moreover, by putting down money without a loan, you also save on the interest you would be paying. For example, if your house costs 50 lakhs INR and you pay 25 lakhs as a down payment, your loan would only be for 25 lakhs, meaning lower EMIs, and quicker repayment of the loan. Plus, you save on the extra interest you would have paid had you paid only the minimum down payment for a home loan and borrowed the rest, say about 40 lakhs.
2. Better loan terms
When you can afford a higher home loan down payment, you become a low-risk borrower. This is because by putting down an amount larger than the minimum down payment for a home loan, you demonstrate good financial capacity and a commitment to the property. Since your financial stability is established, lenders will feel more confident about your repayment capability. So they will be willing to lend to you at lower interest rates and attractive loan terms.
3. Higher purchasing power
When you have more money, financial institutions will be ready to lend you more. So when you make a bigger payment than the down payment required for the home loan, your lender may offer you a larger loan amount. This increases your purchasing power and gives you access to a wide range of options. For example, you can afford a more expensive house or undertake significant renovations to the home you are purchasing without any budget constraints.
Cons of making a larger down payment
1. Lesser liquidity
When you put down more than the minimum down payment for a home loan, you may drain your savings, putting an undue strain on your finances. Investing in real estate, while beneficial in the long run, can cause immediate liquidity issues. In other words, you may be hard-pressed for cash to meet your immediate expenses. So when you decide on how much to pay as a down payment, consider your means and affordability and choose a value that doesn’t deprive you of a rainy-day fund.
2. Longer time to save
You may have to save up for longer to afford a larger payment than the down payment required for a home loan. As a result, you’ll have to wait longer to enter the real estate market and possibly miss out on many investment opportunities. In addition, if the home rates in your target area are rapidly rising, the prices could get away from you by the time you save enough.
3. Lost investment income
When you invest your money as a down payment, you cannot invest it elsewhere. So if you are paying a home loan interest rate of 8% but you could get a return of 10% by investing in a mutual fund, you lose out on the 2% investment income for every rupee you invest in the down payment. Moreover, if the real estate market in your area loses value, you suffer a loss. In such a case, a smarter move would be to pay the down payment required for a home loan, borrow the rest, and invest your leftover cash in the mutual fund.
To conclude
Making a larger home loan down payment is a good idea if you have spare money after accounting for buying-related costs and an emergency fund. Otherwise, it would be wise to put down only the minimum amount required and finance the rest with a loan. This way, you can avail of tax benefits and enjoy more liquidity. So before applying for a home loan, consider your current finances and your future financial goals carefully, and select a property financing plan that best fits your unique situation.
At Tata Capital, we understand different borrowers have different requirements. This is why we offer home loan at attractive interest rates and flexible terms to cater to your unique needs. Contact us today to know more!
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