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.
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.
Certain ways for the borrowers to arrange for margin money.
Additional reading: HOME LOAN FOR A DREAM HOUSE
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.
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.