The thumb rule is that banks finance homes in the range of 75% to 90% of their market value. Therefore, your contribution towards acquiring your home is between 10% and 25%.

What is the need for the margin when the value of the property is going to appreciate in the future? It is true that property rates will appreciate over time. The loan amount will decrease because of your repayments. This is the ideal situation. However, banks have to look at the other side of the story as well. They need to have sufficient security on hand to take care of defaults. You have to admit that defaults are part and parcel of the loan portfolio. The stringent NPA (Non-performing Asset) norms do not allow the banks to realize the income that they have not earned. But, they have the option of taking possession of the property and bringing it for sale. Now, this is a distress sale. Hence, they cannot expect to realize the market value of the house. Therefore, the margin does come in handy for them.

Secondly, when you have a stake in your property, you consider it your obligation to repay on time. This is why the banks maintain LTV (Loan-to-Value) ratio in the range of 75% to 90%. If you see these things from the bank's angle you will appreciate the LTV concept. Every asset of the bank has an element of risk attached to it. This is the main reason they take adequate security for the amounts they finance. The rules stipulate that the banks attach a risk weight to every asset. The banks have to make an overall provision calculated on the basis of the risk weights attached to each asset. This helps the banks calculate the Capital to Risk (Weighted) Assets Ratio. The overall health of the bank depends on these ratios. The LTV concept plays a big role in the calculation of CRAR (Capital to Risky Asset Ratio) because the assets that are adequately secured carry a lower risk weight in comparison to the assets that do not have security. This explains why a Personal Loan or a credit card balance attracts a higher rate of interest than a secured loan such as a Home Loan.