Many banks have a interest rate system where they offer fixed interest rates for the first 5 years subject to a resetting option lateron. This is also a good option to go after. The main advantage of the fixed rate of interest is that your EMI remains fixed for the entire period of the loan. This is not the same in the floating rates. Banks are very quick to increase the rates and EMI and demand the same when the rates go up. This can affect your overall monthly budget. This is because even a difference of 100 per Lakh per month can result in an increase in the EMI by 4,000 in case you have a loan of 40 Lakhs. The rule of thumb is that banks finance homes in the range of 75% to 90% of their market value or by valuation done by its team. Therefore, your down payment towards acquiring your home is between 10% and 25%.
What is the need for the down payment when the pricwe of the property is going to appreciate in the future? It is true that property rates will increase over time. The loan amount will also decrease because of your repayments. This is the ideal situation. However, banks and NBFC’s have to look at the other side of the story as well. They need to have enough security in hand to take care of loandefaults. Everyone have to admit that loan defaults are part and parcel of the portfolio. The stringent NPA (Non-performing Asset) norms do not allow the banks to realize the income that they have not earned. But, they have the option of taking possession of the mortgaged property and bringing it for sale through auction. Now, this is a distress auction sale. Hence, they cannot expect to get the market value of the house. Therefore, the down payment does come in handy for them.
Secondly, when you have a own contribution in your property, you consider it as your obligation to repay Emi on time. This is why the banks maintain LTV (Loan-to-Value) ratio in the range of 75% to 90%. If you see these things from the bank’s point of view you will appreciate the LTV concept. Every asset of the bank has an bit of risk attached to it. This is the prime reason they take enough security for the amounts they give loan. The rules stipulate that the banks attach a risk weight to every asset. The banks have to maintain an overall provision calculated on the basis of the risk weights attached to each property. This helps the banks to calculate the Capital to Risk (Weighted) Assets Ratio. The overall financial health of the bank depends on these ratios. The LTV concept plays a important role in the calculation of CRAR (Capital to Risky Asset Ratio) because the assets that are enoughly secured carry a very lower risk weight in comparison to the assets that do not have security.