Friday, February 10, 2012

Bad News for Home Buyers - Home Loans to get Costly in 2012

Yes, you read the title of the post right. "Home Loans are set to get Costly in 2012". As soon as you read it, you may be tempted to think that the Interest Rates are probably going up and that is why am saying so. Unfortunately my friend, Interest Rates have nothing to do with this. The Reserve Bank of India has issued a new guideline to all Banks that grant Home Loans. This article is about that.

What is the new Guideline?

Reserve Bank of India has asked banks to Exclude Stamp Duty, Registration Fee and other levies from the total cost of the home, while calculating the loan disbursement amount.

How does this affect us?

Registration fees, Stamp Duty, Taxes etc. that are part of the total property being purchased were considered while calculating the home loan amount. Going forward, these fees & taxes have to be borne by the home buyer and will not be considered in the home loan amount.

What are the Various Fee's we pay while Buying a Home?

Stamp duty and other levies vary from state to state. In Maharashtra, for example, stamp duty is 5%, while in Chennai & Bangalore it is 8%, Kolkata 7%, New Delhi 4% and so on. The VAT is 1% across the country and service tax is around 3% (varies from state to state)

Overall this works out to nearly 9-10% of the actual cost of property depending on which state/city you intend on buying your house.

A Real-Life Example:

Before you begin wondering how much this will affect you, let’s take a look at a simple calculation. Let’s say Mr. Ramesh wants to buy a house in Chennai. Below is the Total cost quotation as provided by the builder:

Total Area Cost Per Sq. Feet Undivided Share of Land Cost of Property Registration Fee & Stamp Duty Car Park EB & Water Supply Deposits VAT Service Tax
1200 Sq. Ft Rs. 3000/- 600 Sq. Ft Rs. 36,00,000/- Rs. 2,88,000/- Rs. 2,00,000/- Rs. 50,000/- Rs. 36,000/- Rs. 1,08,000/-

Note: This is just an example for illustration purposes only. The actual quotation you may receive from your builder may vary based on his specifications...

As you can see, the total cost of the house that Mr. Ramesh has to pay in order to buy the Apartment is Rs. 42,82,000/- (Rs. 42.82 lakhs)

Existing Home Loan Calculation:

Total Property Value: Rs. 42,82,000/-
Loan Amount that can be disbursed by the bank (@80%) = Rs. 34,25,600/-
Amount Mr. Ramesh has to come up from his pocket: Rs. 8,56,400/-

New Home Loan Calculation:

Total Property Value (Excluding Fees & Taxes): Rs. 38,50,000/-
Loan Amount that can be disbursed by the bank (@80%): 30,80,000/-
Amount Mr. Ramesh has to come up from his pocket: Rs. 12,02,000/-

As you can see Mr. Ramesh's initial payment amount has nearly become 1.5 times:
Banks will ignore the Service Tax of Rs. 1.08 lakhs, VAT of Rs. 36,000/- and the Registration fee of Rs. 2.88 lakhs. This works out to Rs. 4,32,000/-

Whoa!!! Hold On, Don’t Banks grant up to 85% of the Property Value?

Are you someone, who hit the brakes and thought of this? Did you?

Well my friend, unfortunately this isn’t true. In Dec 2010, in order to check excessive lending by banks, RBI had directed commercial banks against lending more than 80 per cent of the value of a property for loans above Rs 20 lakh and not more than 90 per cent for loans below Rs 20 lakh.

How does this affect Banks & Real-Estate Developers?

Paying up more Initial Money means, people will be hesitant to go for buying homes. If I have to come up with nearly 12 lakhs to buy a property that is worth nearly 40 lakhs, that’s a lot of money. I might need years to save up that kind of money in order to buy my house and go knows, how much property prices will go up by the time I finish saving up 12 lakhs. In all probabilities by the time I save up 12 lakhs (let’s say optimistically I can save it in 3 years) the cost of that property would have gone up to around 50 lakhs and I will still be short by 3-4 lakhs.

In the short term, this decision will put an additional strain and burden on the home buyer.

So, The number of people buying new homes can be expected to drop and The number of people going for Home Loans can be expected to drop.

All in All, the Real Estate Market may face a slowdown due to this move.

Why Exactly did RBI come up with this Ruling?

Experts believe the RBI's latest move is aimed at curbing speculation in the property market. RBI feels that, including all the fees and levies in the value of the property is actually overstating what the house is worth in reality. From a Banks perspective, below is how they may justify this new ruling...

Let’s say, Mr. Ramesh takes a home loan for his house and gets the 34.25 lakhs (including all taxes & fees) disbursed and declares bankruptcy after 1 year. The bank may not be able to recover its full loan outstanding amount. If you ask me why, which I am sure you will, below is how:

1. In the initial years of home loan repayment, Interest works out to almost all of the EMI amount. So, by the end of 1 year, Mr. Ramesh would have probably repaid Rs. 50,000/- in principle amount.
2. Cost of re-sale property isn’t usually as much as a new property. Depreciation will be considered, even if the house is only a few months old. Even if we assume property prices may have gone up in the 1 year period, the amount may not be drastically more than what it was 1 year ago. So, a property that is worth 36 lakhs if new will be worth only around 30 odd lakhs or lesser for resale
2. Cost of VAT, Stamp Duty, Taxes etc. cannot be claimed from the re-sale home buyer. It is not his problem as to how much taxes and fees were paid when the previous home owner bought the house.

All in All, the bank stands to lose a lot of money if Mr. Ramesh goes bust and fails to repay his loan.

Is there any Good Side to this "Anti-Housing" Ruling?

Every coin has two sides. This ruling, which may be perceived as an "Anti-Housing" Ruling too has its benefits. They are:
1. Property prices may stabilize. Making up more initial payments means, lower demand and hence lower hikes in property prices. In all probabilities, property prices won’t double as it has done over the past decade or so (Multiple times I must say). The cost per sq. feet in Chromepet area of Chennai around 15 years back was around Rs. 500 to 600 per sq. feet. Now it is Rs. 4000 or more. Literally it has gone up 7-8 times over the past decade and a half.
2. Lower home loan amount means lower EMI's and you can repay your loans even quickly

I would say, the first benefit is by far the best justification. Though I am not an ardent supporter of this ruling (I too have to come up with that extra money when it’s time for me to buy a home) in the long run, this will help curb the steep rise in property prices across India.

Let’s hope property prices don’t shoot up through the sky like it has over the past decade.

Before we wrap up, below are two articles that you may find useful in your quest for buying a new home:
1. Buying a Home
2. Documents Required for an NRI to buy a home
Happy Home buying!!!


  1. Can we just go for parallel payment when the bank is paying the scheduled payments to the builder...

    1. No. Loan Repayment can start only after house is handed over to the customer. That is when the loan starts and the EMI starts in full.

  2. @ Subha

    I did not understand the Question. Are you asking if you can make the extra amounts (the shortfall after this new guidance) in parallel when the bank is paying its share (the 80%)?

    If so, No. I dont think so. Banks usually expect proof that you have made your share of the payment before they release their share of 80%.

    If Not, please elaborate on your Question :)

  3. Hi I brought house in Ahmedabad, Gujarat and my loan also started and my bank disbursed some amount to builder as per the construction stage and now builder asking me for Service tax on disbursed amount, it this a right or builder making me fool because in my circle who brought the house they paid the service tax at the time of Agreement.

    Can you guide me.

    1. Usually the loan disbursement only starts after the agreement is registered. The service tax is paid at that time.

      Anyways, as long as your builder is able to give you a formal receipt for the payment he is asking you to make, it should be ok. Just remember to check and ensure he isnt double charging you for something you have already paid for

  4. Thank you Anand for your guide line.


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