The term “margin money” is really confusing for first-time homebuyers, but it’s an essential part of the home loan process. Margin money is the part of the property’s price that you have to pay from your own savings. It’s the difference between the total cost of the property and the amount the bank will loan you. For example, if a house costs ₹50 lakh and the bank gives you ₹40 lakh, you need to pay the remaining ₹10 lakh yourself. That ₹10 lakh is your margin money.
Lenders ask for margin money to make sure that borrowers are personally invested in the property and not just relying on the loan. It helps protect the lender’s interests. If the borrower stops making payments, the lender knows the borrower has already put in their own money, so they're less likely to simply abandon the property.
Important Note: Margin money is also known as a down payment.
The margin money required usually depends on the loan-to-value (LTV) ratio set by the lender, which is the ratio of the loan amount to the property’s value. The LTV ratio typically ranges from 75% to 90%. This means that you will need to arrange margin money ranging from 10% to 25% of the property’s value.
For example:
For a property value up to ₹30 lakh: The margin money required could be around 10-20%.
For a property value above ₹30 lakh and up to ₹75 lakh: The margin money required could be around 20-25%.
For a property value above ₹75 lakh: The margin money required could be around 25-30%.
Now that you understand what margin money is, let’s explore various ways to arrange it. The key is to start planning early and explore different options to accumulate the required funds.
To get the margin money for a home loan, you can use your savings or cash in fixed deposits (FDs). If you’re planning to buy a home, it's a good idea to start saving money for this purpose ahead of time.
Plan Early: Start saving as soon as you decide to buy a home. Even small, regular savings can add up to a significant amount over time.
Liquidate FDs: If you have fixed deposits, consider breaking them to arrange the necessary margin money. However, weigh the benefits and penalties before liquidating FDs.
If you have investments in stocks, mutual funds, or gold, you can consider selling them to arrange margin money.
Stocks and Mutual Funds: If your investments in the stock market have appreciated, you can sell a portion of them to arrange funds. However, know the market conditions and also tax implications.
Gold: Gold is another valuable asset that you can liquidate. Given that gold prices tend to rise over time, selling gold can be a good option to arrange margin money.
Getting margin money from family and friends can be fast and won’t usually involve interest. But you should be clear and honest about how and when you will pay them back.
Clear Communication: Make sure to discuss the terms of repayment clearly with your lender to avoid any misunderstandings later.
Repayment Plan: Have a solid plan in place to repay the borrowed amount within a reasonable timeframe.
You can use a personal loan to get margin money, but it can be tricky because personal loans often have higher interest rates than home loans.
Pros: Personal loans can be approved quickly, and they don’t require any collateral.
Cons: The interest rates are higher, which could increase your overall financial burden.
The Employees' Provident Fund (EPF) allows you to withdraw a portion of your savings to buy or construct a house.
Eligibility: You can withdraw up to 90% of the EPF balance for purchasing a house, provided you have completed at least five years of service.
Procedure: The withdrawal process is straightforward and can be initiated online through the EPF member portal.
If you own another property, you can take a loan against it to arrange margin money for your new home.
Collateral: You can pledge your existing property as collateral to secure a loan.
Lower Interest Rates: Loans against property generally have lower interest rates than personal loans.
If you have a retirement fund like the Public Provident Fund (PPF) or National Savings Certificate (NSC), you can consider borrowing against them.
PPF: You can take a loan against your PPF balance between the third and sixth financial years of opening the account.
NSC: National Savings Certificate allows you to borrow against your investment as collateral.
While arranging margin money can be challenging, paying a higher amount has several advantages:
By paying a higher margin money, the loan amount decreases, which reduces your EMI burden. This can be particularly beneficial if you anticipate fluctuations in your income or if you want to reduce your long-term financial commitments.
A lower loan amount directly translates to lower interest payments over the tenure of the loan. This can save you a significant amount of money in the long run.
Lenders might give you better loan terms, like lower interest rates and fees, if you pay a larger margin money. It shows you’re financially responsible and lowers the lender’s risk.
If you contribute a higher margin money, lenders may process your loan application faster since it reduces their risk. This can be advantageous if you are in a hurry to finalize the property purchase.
| Aspect | Details |
|---|---|
| Definition of Margin Money | The amount a borrower needs to contribute from their own savings when buying a property, typically 10-30% of the property value. |
| Why It’s Required | Lenders require margin money to reduce their risk and ensure that borrowers have a stake in the property. |
| How to Arrange It | Savings, selling investments, borrowing from family, personal loans, EPF withdrawal, loan against property, borrowing against retirement funds. |
| Advantages of Paying More | Lower EMI burden, lower interest payments, better loan terms, faster loan approval. |
Margin money is an important part of getting a home loan. Knowing how to arrange it and the advantages of paying more can make buying a home easier and more affordable. By planning ahead, looking at different ways to get the money, and avoiding common errors, you can successfully gather the margin money and move forward with buying your home.
The minimum margin money required typically ranges from 10% to 25% of the property’s value, depending on the loan-to-value ratio set by the lender.
Yes, you can take a personal loan, but be mindful of the higher interest rates and the additional financial burden it may create.
Yes, paying more margin money reduces your loan amount, resulting in lower EMIs and interest payments, and may lead to better loan terms.
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