Buying a house? How much should you pay from your own pocket while taking a homeloan

By: | Published: July 25, 2016 12:22 PM

Own Contribution (OC), as the name suggests, is the amount of money you will be paying to the builder or property reseller from your own pocket to be eligible for a home loan.

home loanOwn Contribution (OC), as the name suggests, is the amount of money you will be paying to the builder or property reseller from your own pocket to be eligible for a home loan.

If you are looking to buy property and are not sure how much you should be paying from your own pocket, you are not alone. Most home loan seekers face the challenge of making their own monetary contribution towards a property purchase.

You may well comply with all the loan eligibility criteria of a lending bank or NBFC, but they will not give you a loan equal to the full value of the property.

You will need to pay a certain percentage of the property cost from your own pocket, mainly to share the risk and also to show your financial commitment towards the property you wish to purchase.

Here is everything you need to know about a borrower’s own contribution while obtaining a home loan.

What is Own Contribution? 

Own Contribution (OC), as the name suggests, is the amount of money you will be paying to the builder or property reseller from your own pocket to be eligible for a home loan. Upon your payment, the builder or reseller will issue you money receipts also known as Margin Money Receipts (MMR) or Own Contribution Receipts (OCR).

By paying from your own pocket, you not only reduce the risk of the lending institution but also underline your financial commitment to the property. This makes the lender offset his risks and offer you a home loan for the remaining amount.

The Ideal OC-To-Home Loan Ratio 

Not many people know that the Reserve Bank of India (RBI) and National Housing Bank (NHB) have listed guidelines for own contribution for different borrowing amounts.

The amount of your own contribution depends on the overall cost of your property. Usually, lending institutions also take into account other factors including the overall loan tenure as well as opportunity cost of investing in other assets to determine the final own contribution amount.

For home loans valued between Rs. 25-75 lakh, the margin money of own contribution can be as low as just 10% of the total property cost. For loans over Rs. 75 lakh, the own requirement increases to 25%. Banks have their own yardstick to offer a maximum loan amount known as Loan-to-Value Ratio (LTV). The LTV for home loans usually hovers around 90%, 80%, and 75% for properties below Rs. 20 lakh, Rs. 20-75 lakh, and above Rs. 75 lakh, respectively

So, for your property worth Rs. 50 lakh, you may get a loan worth Rs. 40 lakh at best. You will have to arrange for the remaining amount from your own resources, and pay it directly to the seller and receive margin money receipts.


Options When You Cannot Meet OC Requirements 

With the high costs of real estate, it is often a challenge to raise the funds for making the own contribution. In such a scenario, you have three realistic choices.

The first option is to wait and rebuild your financial corpus until you have enough funds for your margin money requirements.

The second option is to opt for any unsecured loan like a personal loan to fund your margin money requirements. While this step may appear to be an easy way out, opting for two loans and paying EMIs on both could strain your finances, lead you to default, and dent your credit history.

The third option is that you can opt for a construction-based home loan if you are buying an under-construction property.

OC and Construction-Linked Home Loan 

If you opt for a construction-linked home loan plan, the payments are made on the basis on the construction stage of your property. The plan is shared with you in advance. Let us assume for a home purchase value of Rs 50 lakh, your construction-linked plan is divided into five stages, with each stage requiring disbursements of Rs. 10 lakh each.

Now, assuming you have got a loan at 80% LTV, which comes to Rs. 40 lakh, you would pay the margin money of 20% for the first stage, i.e., Rs. 2 lakh, upfront. This would leave Rs. 8 lakh as the balance of your own contribution. You may now assume that since the bank has to pay a total of Rs. 40 lakh, the balance of your own contribution would be needed at the very end of the loan tenure. The fact, however, is that for each stage, the bank will pay out the 80% of the disbursement for that stage, while you would be required to pay the remaining 20%.

Getting a home loan today is quite easy with quick documentation and loan disbursal provided you have adequate arrangements for your own contribution for the loan. Make full use of this facility, plan your finances, and get your dream home without hassle or worry.

The author is CEO

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