While a home loan is the easiest route to home ownership for most middle-income families in India, one has to be prepared to bear the cost of some share of the property value themselves. The RBI mandates that lenders only finance up to a certain share of the property value. Thus, aspiring borrowers should prepare for the remaining amount before initiating the housing loan application.
How is Down Payment Decided – Your Profile and the Property’s LTV
Home loan offers are extremely tailored. While there are internal and external guidelines that lenders adhere to, the exact loan amount, tenor, and interest rate you are offered depend entirely on your profile and the property in question.
What Is LTV?
The guideline for the loan amount, in particular, depends on the lender’s LTV. LTV, or Loan-To-Value ratio, is a financial term used to depict the loan amount as a percentage of the overall property value. It is calculated by dividing the loan amount by the property value.
LTV = Loan Amount / Property Value
For example, if the value of your property is Rs.50 Lakh and your lender offers you a home loan of Rs.40 Lakh, then the LTV would be:
LTV = 40 Lakh / 50 Lakh
LTV (expressed as a percentage) = (40 Lakh / 50 Lakh) *100 = 80%
Thus, in this example, the LTV works out to 80%.
How Does the LTV Impact Your Home Loan Offer
Lenders decide the LTV based on external and as well internal guidelines. In terms of the external guideline, the RBI mandates lenders to adhere to the below limits based on property value.
For properties valued up to Rs.30 Lakh, lenders can finance up to 90% of the property value
For properties valued from Rs.30 Lakh to Rs.75 Lakh, lenders can finance up to 80% of the property value
For properties valued above Rs.75 Lakh, lenders can finance up to 75% of the property value
Separately, lenders may have internal LTV norms as long as they conform the RBI’s guidelines. For instance, in the case of a property valued at Rs.25 Lakh, the RBI permits lenders to finance up to 90% of property value. However, a lender may choose to set an internal norm and restrict financing within that bracket to, say, 75% of the property value.
How Much Down Payment Should You Plan For?
In line with the guidelines mentioned above, aspiring borrowers need to plan for the down payment amount on the basis of the property value.
Looking to buy a property valued up to Rs.30 Lakh? Be prepared to pay at least 10% of the property value as down payment
Looking to buy a property valued from Rs.30 Lakh to Rs.75 Lakh? Be prepared to pay at least 20% of the property value as down payment
Looking to buy a property valued above Rs.75 Lakh? Be prepared to pay at least 25% of the property value as down payment
Note that the lender could choose to offer a lower extent of financing, which would necessitate you to pay a higher sum as down payment.
How to Accumulate a Sizeable Sum for Down Payment
The most obvious answer to how you can arrange a substantial amount of funds in time is saving; however, one may find it difficult to accumulate the sum due to unforeseen circumstances. Many choose to avail of a personal loan or borrow the sum if the shortfall is a relatively small sum.
But if you have not been able to manage almost all of the down payment amount, you may have to postpone your plan. Those who already own another property do have a solution here. You can consider availing of funds against the existing property.
If you have a home loan on the other property, you can request your existing lender for a Top-up Loan. Alternatively, you can transfer the balance amount on your loan and avail of a Top-up through the new lender. If the property is owned entirely by you, you can opt for a Loan Against Property.
Both solutions will give you access to sizeable funds at a relatively low interest rate, with the benefit of a lengthy repayment tenor. Apply today with a reputed lender to start your home ownership journey without further delay.