What is Margin Money in Home Loan: Key Aspects, Benefits and More

Margin money refers to the part of the total cost of your house that is not financed by the lender. Instead, you've to pay this upfront and it is also referred to as the down payment. As per a Business Standard-Knight Frank report, most urban Indians prefer owning their own home, with 79% preferring Home Loans to fund this dream. If you too are looking to own a house, understanding the role that margin money will play is crucial; it affects loan approval while also impacting overall loan responsibility.

This blog tackles the concept, exploring its benefits and providing tips on how to raise funds for the same. Keep reading to know more.

What is Margin Money

When you apply for a Home Loan, lenders usually finance only up to a certain percentage of the total cost of your home (typically 70-90%). The remaining portion of the total value that needs to be paid using your own money is called margin money. Margin money is required to ensure that the borrower has a personal stake in the property, which reduces risk for the lender. The upfront payment becomes your equity contribution for the transaction.

Margin Money Calculation

Your lender will calculate the loan margin amount depending on the market value of your house, the repayment period, and total loan amount. The stage of construction is taken into consideration if you're availing a loan to build a house.

The margin amount typically ranges between 10-30% of the property value, and can also vary depending on your credit score and loan eligibility. Once calculated, the bank will inform you of the minimum amount required as the down payment; paying above this amount is always an advisable option. It showcases increased investment in the asset alongside repayment capacity.

Here's an example to understand how margin money works: For a 2BHK apartment costing ₹60 Lakh, the bank is willing to offer 85% financing, which means the remaining amount of ₹9 Lakh is the margin money. Furthermore, the registration, stamp duty, and other charges amount to roughly ₹5 Lakh, bringing the total to ₹14 Lakh of out-of-pocket expenses.

Also Read: Essential Financial Tips for Managing Mortgage Loans Effectively

Benefits of Margin Money

Margin money benefits both the borrower and the lender in numerous ways. Here are some of its benefits:

• Improved Creditworthiness: Arranging margin money that meets or exceeds the requirement showcases financial discipline, reflecting on your credit report as a mark of creditworthiness. This leads to better borrowing options in the future.

• Faster Loan Processing: Keeping margin money ready addresses one of the primary eligibility criteria, speeding up loan processing.

• Reduced Interest Burden: Putting down a larger sum as margin money enables you to take out a smaller loan, reducing your total EMIs and their interest. In addition, there is no interest charged on the margin money itself, as it is the borrower's personal contribution.

• Better Loan Terms: Lenders see a borrower with substantial margin money as a low-risk client since increased margin contributions show a shared financial responsibility. This reduces the overall lending risk, in turn leading to better interest rates and terms.

• Flexible Payment: Some banks allow borrowers to pay margin money in instalments, aligned with the disbursement of the loan. This flexibility can ease the financial burden on borrowers and their families.

Also Read: Home Loan vs Loan Against Property: Key Difference

How Do You Raise Margin Money?

Getting margin money requires proper financial planning. Here are some ways you can consider raising funds for your down payment:

• Personal Savings: The money you've saved through the years serves as the easiest source of margin money. This can be money in your savings account, fixed deposits, or other liquid assets.

• Sale of Existing Assets: Existing assets that can be liquidated include mutual funds, stocks and property. However, just be cautious about the tax implications and the market timing when doing such transactions.

• Pick a Suitable Lender: Do your research to find a lender offering attractive loan terms. Some lenders are willing to finance up to 90% of your property value, reducing the margin money required.

• Borrow Money: Borrowing money from your family and close friends is one way to raise margin money for your loan. You can repay the borrowed amount once you've got sufficient funds for the same.

• Make a Budget: Plan and review your finances to ensure you have enough savings to meet the margin money requirements. Creating a budget will help identify surplus funds that can be allocated towards the margin money.

Examples of Margin Money for Other Loans

• Business Loan: For a Business Loan, the margin money is the portion of the project cost that the borrower must contribute from their own resources. Alongside personal savings and investments, the margin money can be sourced from contributions from business partners.

• Vehicle Loan: In the case of a Vehicle Loan, the margin money is the amount the borrower needs to pay upfront, which is not covered by the loan. It's generally a percentage of the total vehicle price.

• Education Loan: In education loans, margin money is the amount of the overall education cost that the borrower must cover out of pocket before the lender releases the loan amount.

Also read - Understanding How Your CIBIL Score Affects Education Loan Eligibility

To Conclude

Margin money is an integral part of securing a loan, and it also helps in planning upfront capital in a controlled way while considering an eventual decrease in the interest paid and the overall cost of the loan. Ensure you have the ability to gather margin money for responsible borrowing without damaging your emergency fund or other financial goals before choosing any loan.

Frequently Asked Questions

What is margin money in loan?

Margin money is the portion of the loan amount that the borrower must pay from their own funds, not covered by the loan. It's typically a percentage of the total loan amount, such as 10-30%, depending on the type of loan.

Is there an eligibility criteria to get margin money?

There's no separate eligibility criteria for margin money itself, as it's your own contribution to the loan. However, lenders do verify the source of your margin money to ensure it's from legitimate channels.

Does the process of getting margin money vary for different loans such as Home Loan and Education Loan?

Yes, the process of getting margin money varies significantly from loan to loan. For Home Loans, lenders scrutiny margin money sources more rigorously due to higher amounts involved, requiring detailed documentation of fund sources. In case of Education Loans, lenders often accept parental contributions more readily and may have relaxed documentation requirements.

Does higher margin money guarantee better interest rates?

No, a higher margin money does not guarantee better interest rates. That being said, it significantly improves your chances of securing lower interest rates. The lender is not obligated to reduce the overall interest rate, but may be willing to if your margin money amount is higher than the base requirement.

Can I use gold or other assets as margin money to avail loan products?

Physical assets like gold, property, or vehicles cannot directly serve as margin money since lenders require liquid funds. However, you can liquidate these assets or take a loan against them to generate the required cash.

What happens if I cannot arrange the full amount of margin money?

If you cannot arrange the complete margin money, you have several options: reduce your loan amount to match your available funds, consider acquiring more margin money, explore co-applicant options to increase eligibility, consider properties or projects within your budget, or look for lenders offering higher LTV ratios.

Do I have to arrange my margin money immediately?

In most cases, you do not have to arrange the entire margin money immediately. Banks or financial institutions may ask you to provide margin money in instalments as your loan tenure progresses and funds are disbursed.

How does margin money affect interest rates?

Sometimes, if you contribute higher margin money, you're seen as low-risk, making you more eligible for competitive interest rates. However, this is not a guarantee.

What is margin money receipt?

Once you have arranged for or paid your margin money amount, the lender issues a margin money receipt as formal proof of the same.