Should you make that 20% down payment for your first home?

Buying your first home is a decision that is bound to be fraught with a range of emotions. Considering these pros and cons of putting down 20 per cent as down payment will help you arrive at a prudent decision.

Pragnya and Atul have been dreaming about buying their dream house. With enough disposable income in their hands, they are certain they will be able to pay their EMIs regularly on time. They have checked their CIBIL score and are certain that their home loan application will be approved.

But before they could set about finding a lender they need to chip in with at least 20 per cent of their own money. Is this desirable?

We list some pros and cons of putting down 20 per cent up front for their new house.

Pragnya and Atul Abhayankar are based in Mumbai. Having reached middle management positions in their respective corporate careers and lived on rent for five years, they have managed to save enough to buy their first home. But even after having done extensive homework on the property and the home loans that they are eligible for, they are still unable to arrive at a decision.

They are unsure about whether or not to put down 20 per cent of the total value of the property as down payment for their first home.

Pragnya and Atul are not unjustified in having their doubts. One does want to take all the right decisions so that there are no regrets later.

Here are the pros and cons of putting down 20 per cent of the purchase price that will help the likes of Atul and Pragnya make an informed decision.

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The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

The pros:

Attractive rates from the lender's end

Putting down 20 per cent of the purchase price, will put you in good stead with your bank. Lenders today typically agree to disburse loans to those who agree to put in anything between 10-15 per cent of the property price as down payment.

Therefore those opting to put in a higher amount will be eligible to get attractive rates of interest.

Further the process of disbursement will be faster as you have already put in your margin money for the property.

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Lower EMIs

The more down payment you make on your mortgage, the lower will be your monthly EMI outgo.

You will be then left with a higher cash flow to make other investments to secure your financial future.

If you continue to make timely repayments throughout the tenure of your mortgage, you will also get a higher credit score in the CIBIL report.

This is turn will reflect positively when you need to take some other emergency loan.

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The cons:

A major blow to your savings

If Pragnya and Atul decide to put in 20 per cent of the property price as down payment, they will part with nearly Rs 30 lakh.

This means that you must be prepared to take a major hit on your savings. Making that kind of commitment is a decision that cannot be arrived overnight, so take your time.

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Your future choices get limited

Putting down a huge chunk of your savings as down payment also means you will have limited flexibility with regards to your cash reserve.

You may find yourself in a bind if you need to buy a new car or are faced with some medical emergency.

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Diversification dilemma

If a lion's share of your savings get locked up as a down payment for your first home, you will be left with only a single investment as you will have little or no cash left in hand to diversify your investments.

Buying your first home is a decision that is bound to be fraught with a range of emotions. Considering these pros and cons of putting down 20 per cent as down payment will help you arrive at a prudent decision.