The Reserve Bank of India (RBI) has recently announced a new move through which it has rationalised the risk weights. Risk weight is the capital which is spared and kept aside by the banks after lending a home loan. The central bank has rolled out this plan to push home lenders to extend more credit and also, to let the borrowers enjoy lower rates of interest. 

In its latest monetary policy, the RBI has recently announced that the risk weights for loans will be linked to the loan-to-value ratios for all the new home loans which will be sanctioned till 31 March 2022. Earlier, the risk weights were linked to the LTV ratio as well as the quantum of the loan. In the current economic condition, the real estate sector has been rather critical and the central bank has rolled out the policy for the recovery of the same. As per the new policy, the housing loans will have a risk weight of 35% wherein the LTV will not exceed 80%. The risk weight can also be 50% wherein the LTV will be more than 80% but will not exceed 90%. 

As a borrower, if you are willing to avail a housing loan of any form, and you decide to pay as much as 20% or more of the property value as a down payment, the lender will have to keep a lower amount aside for the extension of the loan. 

This policy will result in the home loans becoming cheaper and also make the loans safer. Safer loans will also help the lenders to assign lower capital to them. 

Here are some of the important reasons that you should take under consideration while making a down payment: 

  • A larger down payment would mean a better creditworthiness and thus, the chances of the loan application being approved is higher. 
  • If your LTV ratio is lower, the lenders, in general tend to offer better rates of interest on your loan amount. A higher down payment means a lower LTV ratio, thus, lower risk. 
  • On making a higher down payment, you will be able to cover majority of costs at the beginning of your loan tenure. This will help you pay of the loan sooner, that too in lower EMIs. 

That said, with the new monetary policy in force, if you are capable of making a down payment which is more than average, it should be considered. This will be most useful for higher loan amounts.