Real estate industry in
Though not all the builders insist on such a payment structure, there exists a large community of builders who collect payment partly in cash and partly by cheque. Cash to cheque ratio ranges anywhere from 0% to 40%. This basically means that if the property purchase price is Rs 2,000,000, the builder will accept Rs 800,000 as cash payment that is unaccounted and Rs 1,200,000 as cheque, which is accounted money. The property paper will show a lower value of Rs 1,200,000 in place of Rs 2,000,000 actually paid by you.
To persuade you for a cash and cheque payment builders often emphasize the saving that would result on account of lower stamp duty and registration charges outgo. Since these charges are levied as a percentage of sale value of the property mentioned in the agreement deed. Quite a few of these builders even offer discounts for the same. But be careful dont get carried away, such a payment structure would create problems for you when you approach housing finance companies for finance.
Lets see how?
Housing finance companies finance 70% to 85% of the purchase price and you have to put in the balance as margin. For financing purpose, housing finance companies take into account the property price mentioned in the deed. This means that even if you are paying Rs 2,000,000 for the purchase and if the property paper shows the value as 1,200,000, housing finance companies will finance only 80% of this value. You will get Rs 960,000 as housing loan (80% of 1,200,000). Your loan amount is lowered considerably, which leaves you with the task of arranging for a much higher amount (refer to illustration below).
Illustration
Assumptions:
Purchase price of property: Rs 2,000,000
Payment option I: Total cheque payment
Payment option II: 60% cheque payment and 40% cash payment
Finance amount: 80% of purchase price
Amount of finance you can get in each option
Payment
option Property
price (Rs) Property Price
on paper (Rs) Finance amount
(80%) (Rs) Margin
money (Rs) Money to be
arranged (Rs)
Total cheque 2,000,000 2,000,000 1,600,000 400,000 400,000
Cheque +cash 2,000,000 1,200,000 960,000 240,000 1,040,000
The table above clearly indicates that if you opt for part cheque and part cash payment, you will have to arrange for over 50% of the property price from your own pocket. This can be quite a task for a salaried person. Moreover, the practice is unethical. Also, in the event of a dispute with the builder it would become very difficult for you to claim the 40% cash payment (in option II above) legally from the builder.
Effective rate on housing loan drops....
Housing sector has got its share of benefit in the form of tax sops.
The tax benefit on housing sector includes:
Deduction on interest paid on housing loan under section 24 (2) raised to Rs 150,000 from the existing level of Rs 100,000.
In case of repair and collection of rent from the property the limit of 25% of the annual value of the house property under section 24(1) has been raised to 30%.
Surcharge on income tax removed but the 2% surcharge on account of Gujrat earthquake to continue.
Lets try and incorporate these benefits into a sample housing loan and find out how exactly the exemptions and deductions benefit the borrower. To put it simply, it means a decline of 5-6% on the interest rate charged by housing finance companies.
Lets see how?
Loan amount: Rs 1,200,000
Interest rate: 13%
Tern of the loan: 15 years
In case of HDFC, the supporting salary required to avail a loan of Rs 1,200,000 is around 410,000 per annum.
The pay out for the loan would be something like this for the first year:
Banks Loan amount
(Rs) Interest
(%) Years EAI
(Rs) EMI
(Rs) Interest
(%) Principal
(Rs)
HDFC 1,200,000 13 15 185,690 15,475 156,000 29,690
Now lets factor in the tax in the above illustration and compare the payouts when housing loan is taken and when it is not taken. In the table below, calculation is done for the person falling in 30% tax bracket and a 2% surcharge has been taken into account.
Housing loan pay off If housing loan
is taken HDFC (Rs) If housing loan
is not taken. (Rs)
Gross income 410,000 410,000
Less income tax benefit u/s 24
for payment of interest on housing loan 150,000 0
Total 260,000 410,000
Less standard deduction 20,000 20,000
Taxable income 240,000 390,000
Tax 46,000 91,000
Less: rebate on principal (U/s 88 –20%) 4,000 0
Net payable 42,000 91,000
Surcharge 840 1820
Income tax including surcharge 42,840 92,820
Net Saving in tax payable 49,980 0
The table clearly indicates that if a housing loan is taken it results in saving of Rs 49,980 in the first year, thus bringing down the actual outgo for the loan repayment in the first year.
Lets take into account this saving and find out its impact on the interest rate charged by housing finance companies.
HFCS HDFC
Total yearly out go
on loan repayment (Rs) 185,690
Less tax saving (Rs) 49,980
Actual out go on loan repayment (Rs) 135,710
Actual rate of interest 13.00%
Effective rate of interest 7.81%
The table clearly indicates that even though you will be required to pay 13% interest on HDFC housing loan, in real terms your interest outgo will be only 7.81% in the first year.
Given the tax sops in the budget, this is an ideal time for consumers to give a second thought to owning a house.
Home loan: Does pre-payment make sense?
Consumers are very touchy about a loan, especially long-term debt. In spite of the fact that in the last couple of years tax advantages associated with housing loan have increased, many borrowers rush in to pay up their loan amounts before maturity and write off debts. And we all know that housing loans are typically long term in nature.
Does it make sense?
Not in the present environment when interest rates on housing loan are at an all-time low and there are significant tax benefits to housing loan seekers. In fact, it makes better sense to carry debt in general and a housing loan in particular. If you look at your repayment schedule and chose the loan amount carefully, you can save a neat sum through tax rebates. You also get the benefit of inflation over the term of the loan, as money gets cheaper by the year. Tax benefit together with inflation brings down the effective interest rate you pay, considerably. You really have a good deal going.
This doesnt mean that you should not pre-pay your debt. There is a time when you should think of prepaying your loan but time your pre-payment wisely.
Lets take an example to make it clear.
On a 15-year loan of Rs 12,00,000 at 12.5%, the annual repayment for the loan would be Rs 180,917. It would make sense to pay off all the outstandings after the tenth year. By this time you have already availed 80% of the total tax benefit (Rs 523,205 ) that you could avail over the term of the loan. The table below indicates the tax saving every year.
Tax saving over the term of the loan
Years Interest
(Rs) Principal
(Rs) Total tax
savings (Rs)
1 45,900 4,000 49,900
2 44,717 4,000 48,717
3 43,387 4,000 47,387
4 41,890 4,000 45,890
5 40,207 4,000 44,207
6 38,312 4,000 42,312
7 36,181 4,000 40,181
8 33,784 4,000 37,784
9 31,087 4,000 35,087
10 28,053 4,000 32,053
11 24,639 4,000 28,639
12 20,799 4,000 24,799
13 16,479 4,000 20,479
14 11,619 4,000 15,619
15 6,151 4,000 10,151
Total 463,207 60,000 523,205
It is clear from the table above that the amount you save on account of tax from 11th to 15th year is only Rs 99,688, which is less than the tax benefits you would get otherwise. And the amount you have to repay would be Rs 644,166 only. This would not be too much of a strain. So, dont rush in to pay off your housing loan (long-term debt) and when you decide to pre pay time it carefully.
Home Loans: Term loan or over-draft?
Do you need a home loan? Look no further. There are a whole lot of housing finance companies (HFCs) to fulfill your demands. On your part, you need to be sure exactly what kind of a loan you need the term loan or an overdraft.
It goes without saying that to get a home loan, a regular source of income is a must. HFCs offer loans of various types right from buying, construction, site loan, extension, repair and maintenance of property to even financing the stamp duty and registration charges.
Based on the fundamental nature of the loan it can be divided into two categories:
Long-term loan or typical housing loan
Housing loans are generally categorized under long-term loan as they are typically of longer tenure (up to 30 years). The basic feature of a typical housing loan (long term) is that the loan-amount is fixed. The interest for the loan is charged on the full loan amount (debt). A loan seeker is required to pay a fixed installment every month (EMI) as repayment towards the loan (debt servicing) availed to purchase the property. The inherent benefit in this type of loan is that consumers know their total liability (loan amount) and monthly liability (EMI) in advance and are in a position to create provision and plan for the same. This helps in better financial planning. The best part of this loan is that the term (years) of the loan can extend up to 30 years (ICICI Home Loan) and if you have been paying the EMIs regularly, there is no yearly review for the loan after disbursement.
This type of a loan is best suited for consumers who plan to buy a ready property and know their fund requirement for the purchase in advance (property purchase price). Since the term of the loan is fixed in advance, consumers are required to pay pre-payment charge (most of the cases, but not all) should they decide to pre pay. The pre-payment charge varies from a low of 1% to a high of 3% of the loan amount prepaid. A major negative with this loan is that consumers end up paying interest even on the unutilized portion of funds.
Short-term loan or overdraft facility
In the recent past, another type of scheme that is gaining fast gaining acceptance is the overdraft facility. In addition to term loan, foreign banks and nationalized banks also offer overdraft facility. This facility enables the loan seekers to withdraw money as per his requirement. In other words, total liability is not fixed in the beginning. The best part is consumers are only required to pay interest on the amount drawn for the purpose of buying or constructing the house. This basically means that if the loan seeker has drawn only Rs 500,000 for the purpose of constructing or buying a house and his overdraft facility limit could be Rs 1,000,000, he would be paying interest only for the money he has drawn i.e. Rs 500,000.
This type of a loan is best suited for consumers who are not sure about the exact loan requirement. This could happen in case of house construction work carried out by the loan seeker or in case where the loan is taken for home improvement, repairs or maintenance.
A major plus with this kind of a loan is that there are no prepayment charges on account of foreclosure of the loan. The loan tenure under overdraft facility does not exceed a year. However, the tenure can be extended after the bank reviews the facility (solely on banks discretion), which means that the interest rates charged would vary after every review. Moreover the interest rate for overdraft facility is much higher as compared to term-loan. This is not all, there is a commitment fee for the over draft facility and even if the facility is not availed, the commitment fee is charged to you.
So, both these loans have their plus points and drawbacks and you need to choose the option that suits you the most. One thumb rule that can help you in narrowing down to one vis-à¶is the other is if you are looking for a short term loan and are sure about the fund requirement then the overdraft facility would be very handy. But if you know the funds needed for the purchase right at the beginning and are looking for a long term loan, then the term loan would be a better option.
Home owners: Look at refinancing!
Recently the
Whenever there is a cut in interest rates, as has been the case over last two years, homeowners have the opportunity to save money. Lower interest rates generally translate into lower mortgage loan rates. If one looks at the housing loan interest rates 4-5 years ago, they were in the range of 14.5% to 17.0% and the current rate of interest for the same loan is in the range of 11-14%, a clear drop of 3-5%. This basically means refinancing your mortgage at a lower rate can save you a decent amount on every monthly repayment.
Will the savings from refinancing be more than the cost of closing the loan?
Numbers: It does matter!
To get an answer to this question requires cumbersome financial calculation. Everybody wants a simple rule of thumb, and the finance professional are usually quick to oblige. Most commonly one would be told to look for a minimum interest rate improvement of say 2% from the existing mortgage before seriously thinking about refinancing.
But when it comes to mortgage refinancing, the result of such thumb rules can be misleading. The quantum of interest rate cut required to make refinance a better option will vary dramatically depending on the term of new mortgage as well as the existing mortgage and of course the available opportunities for reducing the cost of closing the loan. So, its very difficult to come up with one rule that covers all the possible scenarios with reasonable accuracy. However, to get an estimate one can take specific numbers matching unique situations, like term of the new loan, term remaining for the existing loan, principal component left, old interest/new interest rate in offering, in short, cost of closing the old loan and cost of the refinancing to check whether refinancing make sense or not.
Refinancing: How much would you save?
This is generally a clear-cut calculation, but there is one catch: To cover the cost of closing the loan, one has to shell out money today, but the interest savings that would take place would be over a period of time. As per the time value of money: tomorrow's Rs 100 isn't as valuable as today's. So, it makes sense to convert your future interest savings to today's rupee value to get a fair comparison of cost of closing the loan, particularly if you plan to hold the new mortgage for a longish tenure.
Sounds a little confusing lets work out an example to understand it properly:
Assumption
Housing loan Current Refinance
Loan amount (Rs) 1,155,000 1,000,000
Time (yrs) 15 10
Interest % 16 12.25
EMI (Rs) 17,264 14,900
Total payment (Rs) 3,107,520 1,788,000
Closing cost and refinancing cost: Always factor in!
Apart from the repayment of the loan you need to pay the closing charges of the previous loan and the processing charge for the new loan. As per the industry standard these charges are in the range of 2% each (assumed 2%) Rs 40,000.
The closing cost of the loan would be Rs 20,000, prepayment-charge: (2%*1,000,000) Cost of new loan would be Rs 20,000 processing fee: (2% * 1,000,000)
Actual savings
Years EAI for old
loan (Rs) EAI for new
loan (Rs) Saving
(Rs) Savings discounted
at 10% (Rs)
1 207,168 178,800 28,368 25,789
2 207,168 178,800 28,368 23,445
3 207,168 178,800 28,368 21,313
4 207,168 178,800 28,368 19,376
5 207,168 178,800 28,368 17,614
6 207,168 178,800 28,368 16,013
7 207,168 178,800 28,368 14,557
8 207,168 178,800 28,368 13,234
9 207,168 178,800 28,368 12,031
10 207,168 178,800 28,368 10,937
Total 2,071,680 1,788,000 283,680 174,309
EAI: Equated annual installments
A glance at the table clearly indicates that if we only look at the saving in term of cash outflow it is Rs 283,000, a huge sum, Isnt it? But hold on, all these benefits are going to occur over a period of 10 years, so we need to see the present value of this sum. That is, what is the value of Rs 283,680 today and also the cash outflow of Rs 40,000 as the closing cost of previous loan as well as the cost of new loan (processing + prepayment charges – if any). If we factor in these costs the saving works out to Rs 170,309 (Rs 174,309-Rs 40,000) much lesser than you thought. So, before taking decision to refinance please make sure to factor in these aspects, instead of just going by the ‘thumb rule (interest rate difference should be 2%).
In addition to taking advantage of prevalent lower interest rates and saving money, there are other reasons that may prompt you to opt for refinance. For example you might want to convert your loan to shorter term in order to have that money available down the road for your future needs like, children's education or some other contingency.
However, if you still choose not to opt for refinance, you can always request your current lender to modify your loan. This way you can benefit from the lower interest rate market without taking much hassle of refinancing. Generally housing finance companies have a charge of 0.5% to 2% to shift your loan to lower interest rate, or floating interest rate.
Getting refinance is not a very easy job, so you might have to make a few visits to your housing finance company, but the effort is worth taking, especially when it results in substantial savings in the long run.
Joint Ownership: Tax saving and more!
Competition in the housing finance market is becoming increasingly intense. Companies are getting more aggressive and to make the most of this, you need to be careful.
Housing Finance Companies (HFCs) do their homework well to ensure that the EMI (equated monthly installment) for the loan amount never exceeds 30% to 50% of your net monthly take home. This is to ensure that you are not overburdened with debt every month.
Is the home loan amount enough to buy the property?
Most likely not. Especially if you are living in a city like Mumbai, where property prices are still on the higher side. So what do you do? Simple, club your spouses income with your income. This is permitted by the HFCs.
There is a dual benefit in doing this:
your repayment capacity is enhanced
you can make most of the tax benefits available to you.
Lets assume, you are earning around Rs 50,000 per month and your spouse is earning Rs 30,000 per month and you want to buy a property worth Rs 2,500,000.
No HFC will finance the required amount for your purchase, as your individual repayment capacity would entitle you to a loan in the range of Rs 1,400,000-1,900,000, which is insufficient. If you club your spouses income, the loan eligibility will increase to Rs 2,200,000-2,800,000 - more than enough to meet your requirement.
In the following illustration we have shown how this can be done.
An illustration
Interest: 11.25% annual reducing (fixed)
Years: 15 / EMI: Rs 29,373
First year repayment
Years EAI* (Rs) Interest
(Rs) Principal
(Rs)
1 352,474 281,250 71,224
* Equated Annual Instalment
Maximise your tax benefits
Look at the deal more closely. It has resulted in a lot more benefit than you thought by almost doubling the tax saving on account of tax sops attached to repayment of housing loan (Rs 150,000 on interest component and Rs 20,000 on principal component of loan repayment).
The tax benefit for you on repayment of this housing loan of Rs 2,500,000 would be about Rs 51,250 in the first year. Now since your spouse is a co-owner and contributes towards repayment of the loan she would also be eligible for the tax benefit (both principal and interest component). So the total benefit would amount to Rs 102,500 per annum. Effectively, the repayment per year towards the loan falls dramatically to Rs 249,974 (Rs 352,474 - 102,500).
You can make the most of the existing tax benefits by ensur ing that the higher earning member pays higher portion of the home loan EMI. This is because the tax benefit accrues in proportion to the individuals contribution towards loan repayment. This is especially beneficial in case the interest and principal component of the loan repayment per annum exceed Rs 150,000 and Rs 20,000 respectively.
If you plan to buy a house, it makes sense to include your spouse as a co-owner; especially if your spouses income is taxable. This will result in higher tax saving in addition to boosting your loan eligibility.
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