How much should I save for a down payment?

One of the most common dreams that a lot of working professionals have is to own a home. Now, for most people, the only way to achieve this dream is by applying for a home loan. However, there are a few things that you need to keep in mind before applying for a home loan. Most people just focus on the home loan interest rate. While this is an important factor, home loan borrowers also need to focus on the down payment.

What is the meaning of home loan down payment?
 

The home loan down payment can be defined as the amount you are expected to pay upfront to either the one selling the property or the builder. Generally, the down payment for the loan is known for being dependent on how much the loan amount covers the property cost. This factor is referred to as LTV, i.e., loan-to-value ratio.

The RBI norms state that for loan amounts of more than ₹30 lakhs and up to ₹75 lakhs the loan provider will finance approximately 80% of the home purchase. However, there are some loan providers such as IDFC FIRST Bank who are known for financing approximately 90% of the property. The remaining 10% is expected to be paid by you.

What advantages are associated with down payment?

Here are some of the advantages that are associated with making down payments (especially involving higher sums):

• Helps with faster loan processing
  
  When you opt for a large down payment, the loan provider will assume that you are someone with high creditworthiness and therefore a good saver. The good creditworthiness can help in increasing your chances for a quick loan approval in the future.
• Results in lower interest rates
  
  A down payment of a significant sum may also help with finding the cheapest loan interest rate. A big down payment also lowers the LTV ratio. A low LTV ratio can help you enjoy lower interest rates.
• Can help in lowering EMIs
  
  A down payment of high value also means that a lower EMI will be charged. Through this, it is possible for you to save money for other financial goals.
• Helps in faster loan repayment
  
  Lower EMIs also will result in ease of home loan payment. This means that it might be possible for you to repay your home loan faster.

How should one save for a home loan down payment?
 

Here are some of the ways through which you can save up for your down payment:

• Set a goal
  
  You need to research properties and then compare the prices for a rough idea of your affordability. Based on this estimate, you can then set a budget and work towards saving a fixed sum every month for your down payment in the future.
• Follow the 50/30/20 plan
  
  Another step to save money for a down payment is preparing a 50/30/20 budget and then following it. According to the 50/30/20 plan, you should allot 50% of your expenditures to needs such as electricity, rent, insurance, etc., 30% towards wants such as dining, shopping, and travel, and 20% to other savings/investments. To save a significant sum, please stick to the budget, and cut unnecessary expenditures.
• Consider automating savings
  
  To save money, you should also consider setting up automated transactions towards an investment for your savings. This way, you would not have to worry about setting aside funds every month as it would automatically get deducted from your account on a set date. Over time, a significant sum would have been accumulated for your down payment.
  
  To learn how much of your monthly income should be set aside to save for the down payment, you can make use of the home loan online EMI calculator on the website of the loan provider for checking the monthly instalments you are expected to pay.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.