Dynamic finance options for homebuyers in dynamic environment: Ashwinder-Bhartiya Urban
--By-Ashwinder R Singh, CEO-Residential- Bhartiya Urban, and Bestselling author
Buying a home tops the list of aspirations for most of the Indians since ages, as it provides the much-needed certainty and security. One of the most important milestones of their journey having your own address is a feat to be reasonably proud of. While the first-time homebuyer has a lot of emotion attached along with significant portion of investment set aside, the investors are concerned about the consistent rental yield and a targeted percentage of capital appreciation to consider for resale.
Investment in real estate eventually becomes an enabler for future financing options for making new investments or personal use, where in the investors can be granted loan against the property value or rental being generated from it.
Although not very often, investment in property is not always one time, but some periodic investments on renovation, extension, improvement, etc., do come up. These investments are at a significant cost, where in other housing financing options can be availed by the nature of pre-existing properties owned by the investor.
Coming back to buying a home, owing to the high-ticket size involved, most of the home buyers look out for viable home financing options. Before looking out for the options, following should be kept in mind.
● Select the right vehicle to channel your finances.
● Do a thorough background check and find out which home loan suits you the best
● Keep critical factors like eligibility criteria, eligibility vs affordability, type of interest rate – floating or fixed, principal pay back options, etc.
Home Loan is an easy option for buying a house, but getting the required and apt amount depends upon many factors. Below are some important factors, which play a vital role in deciding the loan amount.
Factors considered for giving a home loan.
1. Your Salary or Your Business turnover
2. Your age
3. Your Existing Loans
4. Your Credit Score
5. Nature of the property you are buying and yourability to upfront contribute 20% of the property value
6. Location, approvals of the property.
Type of Home loans: By rate of interest
Fixed versus Floating loans
The decision whether to opt for ‘Fixed or floating interest rate’ home loan has an impact on your financials and hence, requires careful consideration. So what’s the difference between the two and which is more beneficial for you? Here are some pointers that would help you take a suitable decision.
Opt for a floating rate home loan if -
•You expect interest rates to fall
•You are unsure about interest rate movements
•You want some savings on your interest cost in the near term
Opt for a fixed rate home loan if -
•You are comfortable with the EMI you are committing to pay
•You expect interest rates to rise
•If interest rates have come down and you wish to lock in at that rate
If you are unable to decide, opt for a combination loan which is part fixed and part floating. You can switch between a fixed and floating rate at a nominal fee. At the end, it is the personal choice, but the choice can be right / wrong depending upon how carefully you have gauged the above factors. Today, when the home loan rates are at the record low level, it is in the best interest to opt for fixed interest rate, given the bank is willing to offer.
Type of Home loans
(A) Housing Loans
1. Home purchase loan – It can be availed for purchase of new homes. Includes loans for purchase of new flat, row house, bungalow from private developers in approved projects. Also,loans availed for purchase of homes on resale. Includes loans for purchase ofproperties in an existing co-operative housing society or Apartment Owners’ Association or privately built homes.
2. Construction loans: Includes loans for construction on freehold or leasehold plot or on a plot allotted by a Development Authority. The plot or land should have been bought within a year.If the cost of plot is not included in the loan amount, only the estimation for construction of house is taken into consideration.
3. Balance Transfer: Loans for borrower to transfer his/her outstanding loan availed from existing financial institution or bank to anotherowing to reasons like lower interest rates or better services offered by the other bank. This is done to repay the remaining loan at a revised, lower interest rates offered by the other lender.
4. Home Improvement/ Renovation loans: Every residential property suffers from normal wear and tear due to weather and time-related factors. To maintain the quality and aesthetics of the property, you must undertake periodic maintenance and repair work. Loans for enhancing a home in ways such as tiling, flooring, plastering, painting etc.
5. Home Extension loans: A home extension loan can be availed by someone who wishes to make any structural changes to their existing house to add more living space such as additional rooms, additional floor, etc.
6. Plot loans: Loans for purchase of plot through direct allotment or purchase of a resale plot or plot balance transfer.Lenders usually provide a maximum of 85%-90% of its cost, while the other 15% should be put together by the applicant.
B)Type of Non-Housing propertyloans
• Loan Against Property (LAP): Loans against fully constructed, freehold residential and commercial properties for business needs, marriage, medical expenses, personal needs, or balance transfer from other financial institutions.
• Lease Rental Discounting is a tool to acquire loans from banks using rental receipts as collateral andbecomes relevant for owners of property, who are generating rental yields. The investors can capitalize on the rental receipts to get their loan sanctioned, where in the rental income can pay for their EMIs. The bank will examine long-term cashflow and provide the loan based on the exact amount.
• Non- Residential Premises Loans (NRP): Property loans for purchase, extension or improvement of commercial space, balance transfer of an existing NRP loan from other financial institutions
• Top-up Loans: Loans for a variety of personal or professional needs (other than for speculative purposes)
There are multiple avenues of payments that a home buyer needs to make in the buying process of a newly launched project, and should judiciously chose the financing options for all of these:
Booking amount – For a newly launched project, generally the buyer needs to make certain percentage of the payment (5% to 10% of the sale value). The payment schedule is also handed over to the buyer, on the basis of which the developer will raise the demand.
It is recommended that the buyer utilizes his savings or look out options of soft loan from friends, relatives, or employer where the interest rate would virtually be zero.
Agreement amount – After the booking concludes with paying the booking amount, an agreement is created between the developer and the buyer. Another 10 to 15% payment needs to be made after the agreement execution.
This is the point where in the process of home loan initiates. The developer, to add convenience to the customer can approach the bank, most preferably, the same bank which is providing them construction finance to pre-approve the project after due diligence. The home loan process in, this case, becomes easier to the buyer.
As per RBI norms of 90% Loan to cost ration (LCR) for loan amounts upto 30 lakhs, 80% for loan amounts between 30-75 lakhs and 75% for loan amounts above 75 lakhs may be granted. The amount of loan granted depends on the risk analysis done by the bank for both the developer and client after assessing the applicant’s income, CIBIL score, property’s legal and technical analysis.
Payment on pre-defined timeline as laid out in the agreement – The bank keep releasing the payment directly to the developer based on the demand raised till possession
Stamp duty and registration – The buyer must pay the stamp duty and registration charges as per the state govt guidelines to register the property before legally owning it. These charges are not part of the home loan granted by the bank and the buyer needs to arrange for this.
It is recommended that the buyer plan his budget during the construction period to arrange for these charges to get their possession on time.
The role of developers in enabling the home loan offerings
The only financial incentive that the developer can offer are special seasonal deals. It is not the financial institutions who offer financial incentives, but the developers, e.g. No pre-emi till possession, EMI holiday. While home financing institutions can offer schemes like reduced processing fee and festive rate of interest. These benefits increase the immediate affordability of the customer to ink a home deal.
However, the extent of such offering depends on FI’s internal risk policy, and the risk categorization of the developer coupled with the eligibility of the customer and creditworthiness of both the client and the developer.
All that the developer can do is approach the banks for due diligence to approve their project both for construction finance and retail home loans. They can also request to make the home loan process more convenient for home buyers. The amount of loan to offer along with the schemes depends on the FIs, which is a function of outcome of credit and risk analysis of the developers.
The ecosystem today is very conducive, with several finance options available relating to housing property, be it owning a new one or improving/extending/renovating an existing property, the end users need to evaluate the above-mentioned options carefully. The evaluation needs to be on factors that are personal to the end user and his ability to manage his future cashflows fluctuations with the commitment that comes along with availing the chosen financing options.Unlike other investments, investment in owning a home / plot not only satiate your ambitions, provide you with much needed certainty and security and give monetary returns in terms of capital appreciation and rental yield, but also enables easy financing options for your future needs.