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!!!

Documents Required by an NRI for Buying a House

Buying a House is an important decision both for Resident Indians and Non-Resident Indians or NRIs. There is a lot of clarity about the documents required by Resident Indians for buying a house. Since they are India, they can easily make multiple trips to the bank branch where they are requesting the loan and sort out the problems. But, for an NRI things are not so easy.
The purpose of this post is to throw some light on the basic documents that Banks would ask from NRI’s when they apply for a home loan with them. A Copy of all the below mentioned documents need to be submitted to your bank when you apply for a home loan.

This article is split into Two sections depending on what the NRI is actually doing abroad.

1. Salaried Individuals
2. Self-Employed Individuals

One type of Document that all categories of home buyers will need to submit with their respective banks is “Documents related to the Property”. The Builder will provide a full booklet that you can submit to your bank while you apply for the loan.

For Salaried Individuals

Almost 95% or more of the NRI’s would fall into this Category and they would comprise a huge chunk of the population that apply home loans from banks in India. The documents required would be:

1. Employment Proof – Offer Letter or Contract Letter or Agreement Letter
2. At least 3 months’ Salary Slip (Some banks may ask for up-to 6 months’ payslips)
3. At least 6 months Bank Statement – Statement from the bank where your employer credits your salary
4. Latest Foreign Identification Copy (Ex: NRIC in Singapore and equivalent identification for other countries)
5. Passport (All non-blank pages)
6. VISA/Work-Permit
7. Residence Address Proof in the Country of Residence/Work – Electricity/Gas Bill, Telephone bill etc
8. Passport Size Photographs (The number may vary from bank to bank. They will atleast ask one photo)
9. Latest Credit Bureau Report (Wherever applicable. For country’s like US, Singapore etc this will be required)
10. A Cheque favouring your bank for the Processing Fee

For Self-Employed Individuals

The remaining small % of people who conduct their own business abroad will require the following documents while applying for a home loan:

1. Company Profile, Brochure and Registration Details
2. Last 3 years Income Tax Assessment
3. Bank Statements for the last 6 months (The official bank account that is used for transactions)
4. Latest Credit Bureau Report (Wherever applicable. For country’s like US, Singapore etc this will be required)
5. Latest Foreign Identification Copy (Ex: NRIC in Singapore and equivalent identification for other countries)
6. Residence Address Proof in the Country of Residence/Work – Electricity/Gas Bill, Telephone bill etc
7. Passport Size Photographs (The number may vary from bank to bank. They will atleast ask one photo)
8. Passport (All non-blank pages)
9. VISA/Work-Permit
10. A Cheque favouring your bank for the Processing Fee

Note: The above is a list of the most common & important documents that banks ask from NRI’s while they apply for a Home Loan to buy property in India. However, banks alter their processes from time to time and may ask for extra or fewer documents as compared to the list above. The list is only an indicative list of documents that you will need before you apply for the loan. It is not a complete or exhaustive list. Please contact your respective bank to get a full list of the exact documents they will require to grant you a loan.

Happy Home Buying!!!

Indian Real Estate Market Outlook for 2012

Real Estate is one of the most buzzing words in India for every man. Yes, you read it right. Any man, even one who has just got an offer letter from a company, dreams of buying a home someday. A home which will shelter him and his family.

Buying a home is probably the single biggest decision (Financially) that a Man takes in his life. Buying a home is not an easy decision. It not only involves a lot of time and effort in short-listing a prospective house but also involves a huge investment. With real estate prices booming over the past 5 to 10 years in India, especially in cities like Chennai, Mumbai etc. buying a house involves an investment that runs into Lakhs. Believe me or not, for most people in the working class (you and me of course) lakhs is still a large sum of money. I wouldn’t blame you if you are saying “Come on man, I am not a politician to treat crores like hundreds!!!”

Ok, coming back to the topic, this article is about the Market Outlook for the Real Estate Sector (Residential Properties) in India.

The year that has been – 2011:

2011 has been a significant year for the Residential Real Estate Market in all aspects. All of the below aspects have increased:

a. Cost of Land
b. Cost of Construction Materials (Cement, Sand, Iron etc)
c. Cost of Loans (Rate of Interest)
d. Cost of Labour

Because of this four-fold pressure, cost of residential property has gone up significantly in 2011. However, the looming world financial crisis, Eurozone problems and inflation have struck a dent in this growth towards the second half of 2011. Though prices of properties by top realtors in prime locations haven’t come down, prices in other localities have corrected by around 5% or so towards the last quarter of 2011.

Outlook for the year – 2012:

2012 promises to be an exciting year and property prices (esp. residential properties) are expected to go up this year too. The following are some reasons why the residential property prices will head northwards this year too…

1. Demand for Affordable Housing
2. Growth in Tier II and Tier III Cities/Metro Suburbs
3. Interest Rate Movement

Demand for Affordable Housing

Owning a House is still a dream for a majority of the working class population in our country. With rapid industrialization and growth throughout the country, the demand for houses is bound to increase. Realtors who can build cost-effective homes in good localities are bound to reap big rewards in terms of high customer interest. Everyone needs a house to stay and owning a house is a decision everyone wants to make, provided they get a good deal. So, the demand is going to be there and whenever there is a demand for a certain product, its price is bound to go up. Isn’t it???

Before we begin, by Tier II and Tier III cities I am referring to the cities like Coimbatore, Vishakapatnam, Kochi etc that have been growing at a very rapid pace over the past few years. Though they are not metros, industries have been favouring these cities due to lower costs (in all aspects) than Metros. By Suburbs I am referring to the areas surrounding a Metro City and not the actual city itself.

Growth in Tier II and Tier III Cities/Metro Suburbs

With cost of land sky-rocketing in Metros Real Estate Developers are turning their attention to Tier II & III Cities and also Suburban areas of Metros. This is because, the cost of land in these areas is comparatively cheaper than Metros and prime locations in Cities. Also, most home buyers look for cost-effective homes and cant really afford property at the heart of the city. So, this is the area where the real estate buyers market is and that is what the construction company’s are trying to tap into.

With Major Industries and company’s opening up offices in Tier II & III or Suburban areas, the demand for residential properties in the surrounding areas is bound to rise.

A simple example: In Chennai, when I was in School, areas like Guduvanchery, Urappakkam etc were considered remote places. At that time, price of one ground (2400 sq feet) land there was only as much as what realtors expect us to pay for a single square feet now. That is the kind of growth property prices has seen.

Interest Rate Movement

Loan Interest Rates have been altered by the RBI numerous times since 2012. To be exact, the RBI has changed it 13 times since March 2010. That is roughly once every two months and most of these have been a Northward Movement (Increase). But, over the past few months the rates haven’t changed much and experts forecast that the Interest rates are expected to have a Southward Movement (Decrease). A decrease in interest rates will ease the liquidity condition of not only buyers but also the builders. This will definitely help the housing demand.

Overall, the year 2012 is going to be an interesting and exciting year for the Residential Market in India. If you are someone who has been wanting to buy a home “Now is the Time, my Friend”…

Happy Home Buying!!!

Buying a Home

Buying a home is a dream for a majority of the salaried middle class people. It is something every dad tells his son when he goes to school to motivate him to study harder. Only if you study and get good grades, you’ll get a good job and only then you can buy a big house. The little boy nods his head and thinks of how big a house he wants to own and when the same boy lands in a job, his head starts working towards his goal of a dream home.

All of us have been through this phase of life and almost everyone owns a nice home or plans on owning one in the near future. That is why I thought lets write something on buying something as big and valuable as our home.

Things to do before buying a home:

1. Think long and hard. Include your life partner and maybe a close friend who you can trust with your life and have an open discussion. Buying a house is a long term financial commitment and should not be done in haste. (I am only talking about people who buy a home on bank loans)
2. Plan ahead – if you intend on buying a house in future, start saving for the initial down payment today. If you put aside a small amount let us say Rs. 10,000/- every month for 2 years you will have nearly 2.5 lacs at the end of 2 years and you can use it as the initial payment for your home. Remember – no bank is going to give you a loan for 100% of your home’s worth. They’ll give you only 85% or at max 90% of your property’s value. So you have to pay up the remaining and saving for that is a good idea.
3. Plan your finances – Check the probable EMI you may have to pay the bank once you get the loan, compare it with your net monthly expenditure, salary etc and make sure you can comfortably pay off your EMI. Ideally a person would require 60 - 70% of his salary to take care of his family and it is not a good idea to commit to an EMI that is more than 50% of your monthly salary.
4. Buy only what you need & can afford – many of us dream of a house with a huge garden, a nice car parking space, a road facing balcony etc etc but unfortunately in reality its something that remains a distant dream. We are forced to compromise on an apartment in most cases. I repeat - Buy only what you need and can afford. Do not give in to temptation and buy the apartment that would require you to pay the extra 5 or 10 thousand a month on EMI that you did not plan for. Settling for a smaller house is much better than not being able to pay the EMI or having to compromise on the standard of living.
5. Buy a house that you plan on living for at least the next decade. Do not buy a house thinking that, I will get a better one 4-5 years from now. Buying a house is a big decision and involves a lot of money (you’ll learn why in the later portion of this article) and its better done once or at most twice in a lifetime and it is not like buying a car every 3 or 4 years.
6. Do proper due diligence on the builder/real estate developer who is selling the properly. If the builders name is not very familiar inquire about them. In all probabilities someone in your own office may have had a good/bad experience with them. Either ways you get firsthand information reg. the builder before you sign the papers
7. Get quotations from 2 or 3 banks for home loan. Go with the bank that offers the best deal. Usually the cheapest interest rate bank isn’t always the best one to take the loan. Some banks offer much better service and lesser hidden costs at a fractionally higher rate of interest which is better than bad service and lots of hidden costs.


Is a house an asset?

For ages people are in a belief that a house is the best asset for any individual. Your dad and my dad would bet their heads off to make us believe so. Unfortunately I beg to differ slightly. Let us take a look at the below calculation before deciding.

Let us take myself as an example. I want to buy a Duplex house in a nice residential location in my hometown Chennai, which as per today’s market standards would cost me at least INR 50 to 60 lacs (2010 September) Assuming the house is 60 lacs and I put up 10 lacs from my pocket for the initial payment and get a home loan for the remaining 50 lacs below is how the math works out.

Loan Amount: INR 50,00,000/-
Approximate EMI per month: INR 50,000/-
Loan Tenure: 20 years

Total amount I will pay ABC Bank on my loan: INR 1,20,00,000 /-

If you see here, I am paying 1 crore and 20 lacs over a period of 20 years for a loan of 50 lacs that I got today for my house.

So, by 2030 if the cost of my property is not higher than 1.3 crores (remember I paid 10 lacs upfront for the house) by the end of 20 years, it would be the biggest blunder of my life. Paying 1.2 crores to the bank on a property that isn’t worth that much.

A further point to confuse everyone:

If I were to deposit this Rs. 50,000/- EMI I pay for the home loan every month in a bank deposit that pays me 7% per annum (Simple Interest), I will be left with more than Rs. 2.5 crores by the end of 20 years and if I were to put the same money in an equity oriented mutual fund that gives me 15% returns I will be left with a little over Rs. 7 crores by the end of 20 years

Will my house be worth more than 8 crores by the end of 20 years??? A serious point to ponder about!!!

Things to do after you buy a house?

There are a few things you can do to ease the burden of the home loan and to reap the full benefits of such a huge financial commitment.

1. Buy a pure term life insurance policy for the home loan amount – If I were to get a loan of Rs. 50 lacs I will definitely get a pure term life insurance policy for an equal amount and pledge it against the loan. So, in the unfortunate event of something happening to me, the bank won’t kick my family out of the house. Instead they will claim the balance amount from the insurance policy and pay the remaining to my wife and children. The last thing you want after our time is our family to be kicked out of our house. This is the MOST Important thing to do after or while you buy a house.
2. If you get surplus cash like an inheritance or a bonus from your company, use it to prepay your home loan. It will not only reduce your monthly EMI amount but also the loan tenure correspondingly.
3. Be on the watch out for great deals – once or twice a year banks usually advertise great home loan deals at throwaway interest rates. If you spot such a deal, do not hesitate; change your home loan providing bank. It involves a lot of paperwork and time but the rewards will be multifold. Let me explain with an example.

Assuming my existing loan with ABCD bank is @ 10% rate of interest and I see an advertisement from XYZ bank for a limited time offer 8.5% rate of interest, I rush to the bank and change the loan provider. This results in a saving of roughly Rs. 7000/- per month in EMI which if I put in a bank deposit earning me a 7% rate of interest would sum up to Rs. 35 lacs at the end of 20 years. Not small money my friends…

Conclusion:
I am not saying that don’t buy a house. Everyone needs a house and we deserve to live in a place that we own. Just be careful not to overspend or hurry up on a bad deal. Plan nicely and live peacefully.

Happy home buying!!!