Understanding Margin Money in Home Loan

A certain sum of amount which the borrower deposits initially, to either the bank or a non-banking finance company from whom they are trying to obtain a home loan is called as the Margin money. Lenders treat the contribution of The margin money for a home loan from a borrower is accepted as a sign of trust, which also reduces their own insecurity. They then fund the rest of the amount, that is, the total loan amount less the margin money. The sum of margin money in home loan is determined by the lender, based on factors like the market value of the property, total amount of home loan, tenure of the home loan, and the opportunity cost. While the margin money for properties which is under construction is linked with the stage of construction of the property.

Margin Money Receipt

Once the borrower produces the margin money for home loan, the lender will hand over a receipt for the amount, which is called as the margin money receipt.

Ways to Organise Margin Money for Home Loan

Certain ways for the borrowers to arrange for margin money.

1. Borrowers can cash in their savings when they have to gather a large sum of money for home loan.
2. Borrowers may also take a loan from sources like their employers or companies to pay for the margin money in home loan. Often employers or firms offer soft loans to their employees, which may come at a lower interest rate than from other lenders.
3. Some Banks and NBFC’s also offer a top up loan on their existing loan, which the borrower can use for paying margin money in home loan.
4. By paying the margin money, you confirm your interest in the property thereby reducing the risk for the lender. Once the lender develops trust in you he readily funds the rest of total loan amount.

Additional reading: HOME LOAN FOR A DREAM HOUSE

The percentage of Margin Money or Down Payment Contributed–

Certain important factors are taken into account to decide the margin money, such as market value of the property,the total amount of home loan, tenure of the home loan, opportunity cost which is the loss of a potential gain from another alternative being chosen. Let’s understand it this way – You need a loan of Rs 1,00,000 on which bank agreed to finance or to pay for 70% of the loan amount i.e. Rs 70,000, now where will be the 30% comes from i.e. Rs 30,000 will come from your kitty. And this 30,000 is your margin money which is borne or covered by you.Usually, you will have to contribute 20% of the total cost of the property as the margin money.

Margin money is different for construction-linked properties

The margin money for a property which falls under construction-linked plan (CLP) is directly linked to the stage of construction of the property.For e.g. The purchase value of a property is Rs 80,00,000 and that the CLP is divided into four stages of construction, where each stage of construction will require Rs 20,00,000.If the lender is financing 80% Loan-to-Value ratio (LTV), which would be Rs 64,00,000. So, you have to arrange Rs 16,00,000 from your reserves. For the CLP, the 20% of the total margin money required would be (20% of Rs 16,00,000, is Rs 3.2 lakh). So as the construction progresses, the rest of the money will be funded by the bank and the margin money by you.

Important points to keep in mind

• The margin money paid in cash is usually a fixed percentage and it has to reflect in the home loan buyer’s bank statement.
• If the margin amount is low, though not mandatory often the lenders would make home loan insurance compulsory.
• Save sufficient amount of money before applying for a home loan. You cannot take a home loan without furnishing in a certain amount as margin money for the home loan amount.
• Avoid taking another loan like unsecured debt like a Personal loan, to arrange funds for the margin money.
• Opting for the CLP or under-construction properties is a better option, if you are short of funds for margin money. In such cases, you won’t have to pay the total margin money upfront.
• Keep your documents, photocopies and original margin receipts (MMRs) in order. You will have put forth to the lender during the home loan appraisal process.

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