How to Accumulate Home Loan Down Payment Sum?

Last Updated : June 12, 2020, 11:08 a.m.

Having our own home is the topmost priority for most of us. But not everyone can pay the full price in one go and purchase the home they want. That’s where a home loan helps them. Provided by banks and housing finance companies, a home loan facility provides the required loan amount to individuals that they can repay in easy monthly installments within a fixed tenure. But there is something more important that an individual has to look at while opting for a Home Loan – Arranging the Home Loan Down Payment.

While opting for a home loan, there is a portion of the home price that a borrower has to personally fund (fixed at a minimum of 10%), and the remaining portion will be funded by the lender in the form of the home loan amount. So, the portion that a borrower has to fund from his or her own sources is known as the Down Payment. Without making a down payment, an individual cannot be eligible for a home loan as no lender funds 100% of the property price as the home loan. So, arranging home loan down payment is a crucial thing that a borrower has to keep in mind.

In this article, we will tell you about some of the sources by which you can arrange Home Loan Down Payment and also about the benefits of making a higher Down Payment. Keep reading to get more knowledge about this!

Let’s Talk About Home Loan Down Payment in Detail

Before knowing about the sources to arrange home loan down payment, it would be beneficial for you to know this in detail. As we told briefly in the introduction, home loan down payment is the portion of your home price that you have to pay from your pocket and the rest will be funded by the lender. A down payment is also known as the margin money.

The Down payment generally ranges from 10% to 25% of the overall price of the property. And this tends to change according to the loan amount you are opting for. Suppose you want to opt for a home loan for the property worth INR 40 lakh then the lender can provide you a maximum of 80% of the overall price. So, the loan amount will be INR 32 lakh. The down payment amount paid by you also signifies your financial capacity and a lender can recover the full loan amount in case you default later.

What are the Sources to Arrange Home Loan Down Payment?

So, after knowing about the Home Loan Down Payment, you must have noticed that arranging home loan down payment for an average individual who wants to buy a home is not that easy. It needs proper planning and most importantly, time to accumulate enough funds for your home loan down payment. And when we talk about planning, it must start before the decision of buying a property as it would be very difficult to arrange the down payment amount without any prior preparation.

The most important thing that you need to know in order to arrange a home loan down payment is to know how much amount you will be needing at the time of the home loan. And for this, you must know things like your desired home price, how much time you have, your monthly income, how much money you can set aside every month, etc. These factors will help you in arranging the down payment amount.

Some of the sources by which you can arrange Home Loan Down Payment are fixed deposit, recurring deposit, mutual funds, etc. We are providing details about each of them below. You can have a look!

Fixed Deposits (FD)

One of the best methods to accumulate your down payment is through savings over the years. These savings will hugely help you at the time of home loan as you will be ready with the down payment amount through your savings. And this is one of the things that you have to plan in the advance. When we talk about methods to save, opening a Fixed Deposit is one of the popular methods among individuals.

Also known as the Term Deposits, fixed deposits can be opened for as short as 7 days and as long as 10 years. So, you can choose the tenure according to your future plans. An individual can get guaranteed returns on their deposits without any element of risk involved. There are so many lenders that provide the option of Fixed Deposit with attractive interest rates. You can choose the one that helps you arrange the required down payment sum. One thing that you should remember that interest rates on your deposit vary according to the tenure you choose.

You can also use the FD Calculator to choose what will be the right deposit amount for you by putting different tenures in the tool. It will give you the exact maturity amount based on your inputs. We are also providing Fixed Deposit Interest Rates of some of the top lenders in the table given below. You can check them to make a better decision.

Fixed Deposit Interest Rates of Top Lenders

Recurring Deposits (RD)

Other than opening a fixed deposit in a bank, there is one other savings tool that is popular among individuals. This is known as Recurring Deposits (RD). With this tool, you can start savings instantly by depositing a small amount every month to the lender. You will get an interest amount on your deposit that you will get once your deposits get matured. Interest Rates on recurring deposits change from one lender to another, so you should compare and choose the best one for you.

Recurring Deposits are considered to be more flexible than Fixed Deposits (FD) and are mostly preferred by those individuals who want to build a habit of savings. Generally, interest rates on Recurring Deposits range from 4% to 8% and provide an amazing opportunity to salaried individuals who can set aside a fixed amount every month. Also, the tenure can be chosen according to your goal. Usually, it ranges from 6 months to 10 years.

Having an RD can help you in accumulating the Home Loan Down Payment as you can plan about how much amount you will need to deposit to get a maturity amount that you can use as your down payment. Well, this can be done by the Recurring Deposit Calculator. You just need to put a few details into it such as Deposit Amount, Tenure, and Starting Date. As soon as you will feed all these details into this tool, you will get the Maturity Amount.

Suppose you want to open an RD of INR 5,000 per month for 5 years. The rate of interest on your Recurring Deposit is 5.75% per annum. On putting these details you will get the maturity amount as INR 3,48,012.

So, you can have an idea about the amount and according to that, you can change the deposit amount or tenure. In case you want more maturity amount with the same deposit per month then you can choose another lender with higher interest rates.

Investment in Mutual Funds

As we told you about how before accumulating the home loan down payment amount, you must have a clear idea about how much amount you will need at the time of loan application. This goal can help you in planning your finances properly. For individuals who have at least 5 years of time in their hands, Mutual Fund Investment can be a suitable option for them.

Other than the desired return amount and time, individuals must know their risk profile so that they can invest according to that. For example, if you want to accumulate a home loan down payment after 7 years from now then it will be suitable to invest in Aggressive Hybrid Funds or some equity mutual funds. As the unpredictability of the market is considered to be higher in the short term, that’s why it is important to consider the time in hand and risk profile.

The investment in the mutual fund of any Asset Management Company (AMC) can be done by the Systematic Investment Plan (SIP) where you can invest a fixed sum of amount for a definite period and after this period, you will get the return amount. If you have a definite amount in your mind and you want to know about what must be the ideal SIP amount for you, you can use this amazing tool SIP Calculator.

You will need to feed in a few details such as the expected return amount, number of years, and the expected return percentage. As soon as you will feed these details into your account, you will get the monthly SIP amount instantly. Let’s understand this through an example.

Suppose you have a goal of getting INR 20 lakh after eight years from now with the expected return of 12% per annum then you will need a monthly SIP amount of INR 12,506 to obtain this amount. After knowing this amount, you should look if you can set aside this amount from your monthly income. This is just an example of estimating the SIP amount.

A lot of people think that SIP is itself a mutual fund or something other than a mutual fund which is totally wrong. SIP is only a style of investment. It is nothing but a tool of investment by which you can invest periodically in any mutual fund scheme you like.

Opt for a Loan

If you are unable to accumulate the down payment amount till the time of opting for a home loan then you can choose a loan to arrange the Home Loan Down Payment. But you should remember that this option should be your absolutely last resort. Opt for a loan only if you do not have any other options and it is very important to buy a home immediately and can’t wait for some time.

A lot of people opt for a personal loan that can be availed from banks or financial institutions for a fixed period of time at interest rates usually higher than home loans. When you opt for a personal loan, your borrowing capacity takes a hit as you will be paying the personal loan EMI. This will act as an existing obligation for you. Other than a personal loan, you can also opt for a loan against Life Insurance Policy, National Savings Certificate, or against your Gold.

All these loans can be taken at a much lower interest rate as compared to personal loans. But it’s better to work towards saving money for the down payment instead of taking two back-to-back loans at a time.

Are There any Benefits of Making a Big Down Payment on Home Loan?

The minimum down payment that a borrower has to pay is fixed at 10% of the overall property price. But you are allowed to pay a down payment amount which is more than required. After knowing about all the useful sources to arrange down payment (DP) for your home loan, you must know about some of the advantages you can enjoy by paying a higher DP. All of them are mentioned below. Check them out!

• By paying a big DP initially, you can have a much larger share of equity in your own home as compared to paying only a 10% down payment.
• When you pay a higher amount of down payment, your loan amount will automatically reduce. And interest rates on a lower loan amount are usually lower than higher loan amounts. So, this will be an added benefit to you.
• Lenders take less time in sanctioning the lower home loan amount as compared to higher loan amounts as they feel more risk-free in lending lower amounts.
• Higher Down Payment also leads to savings on processing fees as it depends on the loan amount you are required.