In a home loan
The margin is the part of the property price the buyer pays from their own money.
Net Worth & Solvency Glossary · Lending
Margin Money: The Borrower's Share Lenders Insist On
noun · also "margin", "own contribution", "promoter's contribution"
Definition
Margin money is the borrower's own contribution to the cost of an asset or project that a lender is financing. It is the difference between the cost and the amount the lender will advance.
A lender insists on it so that the borrower has a real stake in the outcome.
Meaning
01How margin money is fixed and where it must come from
In a loan, the lender sets the most it will advance against the asset's value or the project cost. Whatever is left is the margin, and the borrower pays it from their own funds.
In a business loan
It is the promoter's contribution to the project or to working capital.
The margin has to be genuinely the borrower's. Lenders check where it came from, because a margin funded by another loan defeats its purpose: the borrower is meant to bear the first loss. A large credit just before disbursement will be questioned, and one that cannot be explained can stall an otherwise complete sanction.
Some lenders may accept part of the margin from a close relative's funds, depending on their policy. Where they do, the relationship usually has to be shown, and the money has to be:
The borrower's own money once given, with the relationship shown.
If it is a loan, it becomes a liability, which weakens the very assessment it was meant to support.
Is margin money refundable?
No. Margin on a loan is the borrower's own money, spent on the asset alongside the lender's funds. It is not a deposit that comes back. A cash margin held against a bank guarantee is different, as explained below.
Evidence
02Proving a margin contribution through a certified statement of assets
A certified statement of assets is a common way to show a lender that the margin is available, particularly for self-employed borrowers.
The statement lists the assets the margin is to be paid out of.
A margin that exists only as equity in a property cannot be paid on the disbursement date.
Not the last financial year end, because a lender wants to see the funds as they stand now.
Where family funds are involved, the source is documented and the relationship shown, because a gift and a loan look the same on a bank statement and are treated very differently by a lender.
A net worth certificate for a bank loan can be prepared for this purpose.
By loan type
03Own-contribution norms Indian banks apply to home, vehicle and education loans
How much margin is needed depends on the product and on the lender.
- Home loans
The lender's maximum advance is capped by the Reserve Bank of India's loan-to-value limits and by its own policy, so the buyer's share depends on both.
- Vehicle loans
The margin is set by lender policy and often differs between new and used vehicles.
- Education loans
The requirement depends on the loan amount and on whether the course is in India or abroad.
The exact margin is set by the lending bank's own scheme.
- Business loans
The margin is agreed case by case, against the lender's appraisal.
In every case, the required margin is written into the sanction letter as a condition of disbursement.
More than the stated margin. Registration, stamp duty, insurance and processing fees often sit outside the loan, so the cash a borrower needs on the day is more than the stated margin.
Written by Subham Jhunjhunwala · Reviewed by CA Sundram Gupta
This entry describes Indian lending practice in general terms. The lender's sanction letter governs each loan.
Need help with a certificate that uses margin money? See our Net Worth Certificate for Bank Loan.Prepared as at a date close to disbursement, showing where the margin will come from.