Tuesday, July 25, 2017

Rent vs Buying a house? What should I look for?

Author: Sachin Gupta | Find me on Twitter

This piece of the blog is primarily meant for residential end users/occupiers who will either end up owning or renting a house. Now, owning or renting is a dilemma which most of us face sooner or later in our careers. As easy as it may sound, but the decision is never without its fare share of glitches. Sumit Sharma, 29 years old, got recently married. He moved to Gurgaon 3 years ago and is currently working in a reputed company with decent salary and like most people of his age group he was stuck with this dilemma of owning vs. renting. On one hand there is easy access to home loans and plentiful of home supply with most builders screaming aloud from the rooftop to sell their real estate projects across India (oops...Houses) but on another hand there are some worries such as monthly installments, maintenance issues, locality, property valuations, and so on.

So, what are the factors that encourages owning as compared to renting and vice versa. Let’s Break It Down (L BID) to smaller elements. The core elements in this dilemma are:

- Down Payment element
First thing first, the most important element of making a decision to own a house boils down to down payment issue. In most cases, 15-20% of house value is paid towards down payment while the remainder is provided by the bank loan if credit worthiness of the person in consideration is good. Now, minimum price for a ready to move apartment in low rise or high rise building in Delhi NCR region (check the prices for other regions) ranges from 35 lacs to 40 lacs (prices vary for different locations). So, one has to have a minimum of 6-8 lacs in his/her pocket before even thinking of owning a house.

- Cash Flow element
Now, having passed through the first element with flying colors one has to do some cash flow calculations before going to the builder. Minimum rent for a similar apartment in Delhi NCR region (check rentals for other regions) ranges from 12 to 18 thousands with no overheads of property taxes, maintenance, insurance etc, whereas cost of owning will include loan installments + property taxes + insurance + maintenance charges. Monthly loan installment for the remaining 29 to 32 lacs will dent one’s pocket by at least 25 to 30 thousands depending upon the interest rate and tenure of the loan. Globally, housing is considered affordable if it is accessible at 25 to 40 percent of gross monthly household income for either rent or loan installments.

- Bubbles in House Price/Future Value
Bubbles normally lead to exorbitant prices when considered in relation to the underlying fundamentals. In Delhi NCR region, one would have noticed that residential property prices have appreciated sharply compared to the rentals. In most areas of NCR, the prices have appreciated by about 3-4 times in last 5 years whereas rental appreciation had been rather weak. What does this suggest; I guess you guessed it right, the price appreciation in property is not indicative of the actual demand & supply elements. Rather it’s the result of expectations that investors, builders are placing on the region due to forecasted economic growth. Now, when expectations are multiplied by expectations year after year, it leads to bubbles and you & I can only be the victims of the bubbles positively or negatively (in case the bubble bursts).

- Flexibility element
Flexibility element is crucial for those who tend to relocate because of employment, family, or other reasons. It doesn’t make any sense for a person to buy a house for 2-3 years and then again have to sell it because of relocation unless the house is purchased with an investment perspective.

- Credit Quality element
Those who are just starting their career with limited salary and no previous bank record will find it difficult to get the loan unless one has sufficient equity at his/her disposal and hence renting is the most likely choice for them.

- Ease of transportation
In metros and especially in Delhi NCR region, home-office-home travel is getting longer by the day. Buying a house nearer to the office is being considered a vital element. However, that comes with a heavy price tag. However, renting a house close to the office could be a serious consideration if one’s primary focus is the proximity to the office.

- Recreational activities
With changing lifestyle, recreational activities play an important role in one’s decision to own or rent a house. Other facilities such as shopping malls, schools, local connectivity also adds to decision making process of buying/renting the house. However, all these facilities come with a price tag especially in case of buying.

So friends, having considered all the above elements, a certain weightage can be given to each element and final result should be evaluated in favor of owning vs. renting. The analysis can yield different results for different individuals depending upon how much weightage they assign to each element.

Have any Questions??


Monday, July 17, 2017

What are Real Estate Investment Trusts and why do we need them badly in India?

Author: Sachin Gupta | Find me on Twitter

Recently, Securities and Exchange Board of India (SEBI) has put up Real Estate Investment Trusts (REIT) for public comments in order to draft the final set of guidelines.

So, what are REITs and what benefits can they provide to small investors with 2-3 Lacs of invest-able income? Can these investors invest small amounts in REITs? We explore here.

A real estate investment trust is basically a creation of the internal revenue code. It is a real estate company or trust that has elected to qualify under certain tax provisions to become a pass-through entity that distributes to its shareholders substantially all of its earnings in addition to any capital gains generated from the sale or disposition of its properties. Because the individual investor has the opportunity to pool his/her resources with those of persons of like interests, funds are assembled to permit purchase of buildings, shopping centers, and land in whatever proportion seems to offer the most attractive returns. Investments must be approved and management activities reviewed by a board of trustees who are accountable to shareholders and are ordinarily well qualified to make such decisions.

Following are the requirements to qualify as trust in countries where REITs are in existence for years:

Asset requirements:

  1. At least 75% of the value of a REIT’s assets must consist of real estate assets, cash, and government securities.
  2. Not more than 5% of the value of the assets may consist of the securities of any one issuer if the securities are not includable under the 75% test.
  3. A REIT may not hold more than 10% of the outstanding voting securities of any one issuer if those securities are not includable under the 75% test.
  4. Not more than 20% of its assets can consist of stocks in taxable REIT subsidiaries.

Income requirements:

  1. At least 95% of the entity’s gross income must be derived from dividends, interest, rents, or gains from the sale of certain assets.
  2. Minimum of 75% of gross income must be generated from rents, interest on obligations secured by mortgages, gains from the sale of certain assets, or income attributable to investments in other REITs.

Distribution requirements:

  1. Minimum of 90% of REIT taxable income must be distributed to shareholders.

Stock and ownership requirements:

  1. Be taxable as a corporation
  2. Board of directors or trustees should manage the REIT
  3. Fully transferable shares
  4. REIT shares must be transferable and must be held by a minimum of 100 persons

REITs that are not listed on an exchange or traded over the counter are generally called private REITs.

Various types of REITs:

These REITs are further subdivided into those that own industrial, office, or a mix of office and industrial properties. Some analysts further segregate these REITs by property location (i.e., whether they are in CBD or suburban locations). For example, if REITs were to become reality in India, the REIT with focus on Office Space in Gurgaon can result in attractive returns for investors.

These REITs are further subdivided into those that own strip centers, regional malls, outlet centers, and free standing retail properties.

These REITs are further subdivided into those that own multifamily apartments and manufactured home communities. Some analysts further segregate those REITs that own student and military housing.

REITs that own a variety of property types.

REITs that primarily own hotels, motels, and resorts.

Health care: 
These REITs specialize in owning hospitals and related health care facilities that are leased back to private health care providers who operate such facilities.

Self storage: 
These REITs specialize in ownership of self storage facilities.

These REITs specialize in numerous types of properties, including prisons, theaters, golf courses, cellular towers, and timberland. Specialty REITs have been a rapidly evolving segment of the industry.

Have any Questions?

Friday, July 14, 2017

A typical real estate project development process

Author: Sachin Gupta | Find me on Twitter

Once the land development process has been completed successfully, a developer will focus his/her energies on the project development process. Developing and delivering a real estate project successfully is challenging and it lasts for several years passing through various phases. Primarily any real estate project can be divided into 5 phases:

Phase I – Land acquisition
The details about land acquisition process can be found in our earlier post of land development process.

Phase II – Construction
Construction phase requires applying for license (permitting), and project development.

  • Permitting/Licensing:

The permitting process usually begins with an application which identifies the site, its location, and a preliminary design of the improvements to be constructed. This application is then used by public officials to verify compliance with its current zoning classification. If it complies, the permit is granted and the construction of the project may commence subject to building codes and inspections. If the permit is denied, the applicant will usually clarify or amend the application and will ask the city planning staff/director to review it again.

  • Preliminary checklist – Project development:

This checklist is usually the first step that a developer reviews when evaluating a site for possible development.

    1. Allowable uses per zoning classification.
    2. Minimum lot size per zoning classification.
    3. Maximum floor to area ratio (FAR).
    4. Building bulk/density limits.
    5. Setback/building line.
    6. Building height limits.
    7. Building footprint/envelope.
    8. Parking ratios.

  • Important terms/project development:
    1. Setback/building line – requirement to construct building a specified number of feet (setback) from the right-of-way line or other landmark.
    2. Right-of-way line – area designated for a public street or alley that is dedicated for traffic, public use, utilities, etc.
    3. Building related terms:
          • Footprint – it is the shape or outline of the primary building slab or foundation as it will be constructed on the site.
            • Envelope – the total outside perimeter of a structure, including footprints and any exterior patios, mall ways, landscaping, etc.
              • Facade – the exterior, usually the main entrance of a structure
                • Bulk – a three dimensional space within which height, width, footprint, and number of structures/elevations/shapes are viewed in total relative to the land area upon which it will sit to determine land use intensity.
                  • Building codes – refer to required materials and methods used to construct improvements within a jurisdiction.
                    • Permit- document executed by the director of planning authorizing the construction, restoration, alteration, repair, etc., of a structure and acknowledging that it conforms to requirements under the applicable zoning ordinance.
                1. Floor to area ratio (FAR) – it is usually calculated as gross building area divided by square footage of land area.
                2. Height restrictions – used to limit the vertical height of a structure to be constructed.
                3. Allowable use – user activities permitted in a zoning classification
                4. Impact fees – charged by public entities to cover added public sector expenses expected to be caused by the development such as traffic control, drainage, etc.
                5. Incentive zoning – used by city planners to accomplish community goals simultaneously with private sector development.
                6. Inclusion zoning – part of a zoning ordinance that requires that a specified type of development be included in order to obtain permit for that site.
                7. Minimum lot size – per zoning classification
                8. Parking ratio – required number of parking spaces per sq. ft of gross building space or per number of apartment units.
                9. Site plans – drawing done to scale depicting the placement relative to other requirements
                10. Traffic counts – number of vehicle trips per hour past a specific site.
                11. Encroachment – occurs when the construction of improvements extends over a property line on to an adjacent property.
                12. Property tax abatement – forgiveness of taxes for a specified number of years.
                13. Land to value ratio – calculated as rupee value of land to total project value (including land) anticipated upon completion of project.

              Phase III – Completion and occupancy

              There are certain risks in any real estate project development. Once the construction has been completed, there is an additional risk of selling and handing over the project to clients or bringing in tenants in case of rental property. Risk begins with land acquisition and increase steadily as construction commences until cash flows from the leasing phase materialize. It should be noted that factors determining the demand for type of space (such as office, retail, warehouse) being developed are critical to project risk. These factors may manifest themselves in current market indicators, such as vacancy rate levels, rent levels, or the extent of leasing commitments from the tenants.

              A very good understanding of the underlying economic base of an urban area or region is critical when assessing the viability of real estate development.  The point is that investors must examine the demand for space in terms of the characteristics of the demand by end users (tenants) in a given market. This demand in turn depends on the type of employment in the local market and the nature of the functions tenants will perform. Only by understanding the local economy and the nature of employment can developer anticipate demand accurately and produce and supply the quantity and quality of space in the proper combination to satisfy market demand.

              Phase IV – Management

              Once the property is occupied by clients/tenants, there is need for professionally managed facility management team. This team can look into the property management tasks such as maintenance, HVAC, parking management, security, civil works, housekeeping, landscaping, etc. These tasks are equally important and ascertain the long life of property and thus ensure positive rental income as well as capital appreciation. 

              Phase V – Sale
              The developer may choose to sell the property from construction phase onward as happens in residential development in India. Or he/she may choose to hold the property in case of commercial developments provided rental income from the commercial properties is significant enough to justify retention.

              Have any Questions?

              Friday, July 7, 2017

              How to Choose Building Materials and Estimate their Cost and Quantities for House Construction?

              Building material is any material which is used for the construction purposes. Building materials can be categorized into two sources, natural and synthetic. In order to construct a good quality house in the amount you have budgeted, a thorough understanding of the quality parameters, cost and quantities of these building materials are required.

              The cost of construction depends majorly on the following factors:
              1. Architectural Design opted (like Open Top, Sloped Roofs, terraces with add-on features etc.,)
              2. Structural Design (depends upon type of strata available for foundation and numbers of floors / configurations (basement, stilt,G+2 etc.)
              3. Specification of Building materials selected (Quality/Brand of materials used for painting, flooring, woodwork, Bathroom, Electrical etc.)
              4. Exterior Finish chosen (i.e. front elevation design, stone cladding, facade, etc.)
              5. Peripheral external developments (such as compound wall, driveway, landscape, hardscape, Gate etc,).

              The other minor cost head would be cost of liaison, charges for construction permits & building approvals.

              The Construction cost can be broadly split into Labor and Material Cost. The extremely increasing construction trends are considered the driving force behind this fast upraise of total building construction costs. Taking this trend, the material manufactures have raised the prices of materials considerably in last decade or so.

              Before planning for a bungalow/individual construction unit, one must be aware of the quantities and cost of building materials as they constitute around 55-60% of the total construction cost of a house. While taking a personal round of the nearby market, one should also avail services of construction turnkey solution providers and then take a judicious decision before the start of the construction.

              Refer the info graphic attached in the article to get the building material consumption and their costs for a 1000 Sqft budget house construction. The material quantities can be extrapolated based on the built up area of construction you are planning for.

              The Major raw material, intermediately and finished construction materials contributing major pie to overall material cost are:

              1. Reinforcing Bars(Rebars) / Steel:

              Reinforcement steel is the most important structural material in construction. Steel is used in RCC (Reinforcement cement concrete). Generally rebars available in the market are manufactured through Thermo mechanical treatment (TMT). Rebars comes in different grades (i.e, Fe415, Fe500, etc.,). Fe500 is generally recommended by structural designer for structural requirement fulfillment.

              The approximate Steel consumption per sq.ft built up area (BUA) is 4 kg (for low rise construction i.e., less than 4 floors of construction). Steel contributes the most among all individual materials, about 25% of total material cost. So, a price rise of Rs.5 per kg can make big difference in the total cost of construction.

              2. Cement:

              Cement is an important construction material and when mixed with materials like sand, aggregates (stone chips), and water, it binds them together. It is used in concrete, in brick masonry work, in tiling, and in plaster works.

              Good quality cement should feel smooth when rubbed between fingers. If a small quantity of cement is thrown into a bucket of water it should sink and not float. Cement should always be kept free from moisture. Its storage should have finished floor raised to at least 300mm above ground level and should have airtight storage. Use of cement older than 2 months should be avoided as cement loses strength with increase in its shelf life.

              OPC 53 grade is generally used for concrete works and blended cement (PPC & PSC) for masonry, tiling and plaster works.

              The approximate cement consumption per Sq.ft built up area (bua) is 0.4 bags. Cement as a construction material contributes about 16% of total material cost.

              3. Sand:

              Sand is used mainly in Concrete, Masonry, Plaster and Flooring. Good sand should be well graded i.e., particle size ranging from 10mm to 0.150 mm for concrete and masonry works, and 5mm to 0.150 for plaster. It should be free from slit/clay and organic matter.

              Natural Sand (also called River Sand) is obtained from River Beds. Due to environmental impacts and stringent laws by the government, Natural sand is slowly and gradually being replaced by Crushed sand (for concrete and masonry works) & Plaster sand (for plaster works). Crushed Sand and Plaster Sand are manufactured from Quarry Stone using latest production technology.

              Sand consumption per sq.ft built up area (bua) is 1.8 cft and contributes about 12% of total material cost for building construction.

              4. Aggregate:

              Crushed rocks are used as coarse aggregates and are generally used in making concrete. Coarse aggregates are normally available in two fractions 20mm and 10mm for concrete making.

              Aggregates should be clean, dense & hard. The aggregate should be neither flaky nor elongated. Flaky and Elongated aggregates decrease the strength of the concrete and demands more cement. Aggregates should be stored properly and different fractions must not be intermixed. Both these aggregate fractions should be used invariably.

              Coarse aggregate (chips/gravel) consumption per sq.ft built up area (bua) is 1.35 cft. Aggregate as a construction material contributes about 8% of total material cost.

              5. Bricks:

              Bricks, in old days, were commonly made of clay and were known as burnt clay bricks. Now a days, bricks are made of other materials such as fly ash. But clay bricks are still widely used in low rise residential constructions today. Bricks are used for masonry wall construction. Other substitute materials to bricks are Concrete solid/hollow blocks, Autoclaves Aerated Concrete (AAC) Blocks and Cellular light weight concrete CLC Blocks.

              The clay bricks should have uniform size, uniform copper color, plain (without undulated surfaces), rectangular surfaces with parallel sides and sharp straight edges. Well burnt brick should give a metallic sound when struck with other brick. Good bricks should not exceed +/- 3 mm tolerances in length and +/- 1.5 mm tolerances in width and height. Water absorption should not exceed 20% by weight.

              Bricks approximately cost Rs.7000 per 1000 units (Nos). Bricks contribute to about 5% of total material cost and are consumed approximately at 1.45 brick per sqft of built up area (BUA).

              6. Tiles:

              Ceramic tiles are generally made from red or white clay fired in a kiln. They are finished with a durable glaze which carries the color and design. Ceramic tiles are manufactured for both wall and floor, having varying degrees of wear resistance and water absorption. High strength and Low water absorption ceramic floor tiles are commonly known as Vitrified tiles. Tiles prices vary according to their types and quality.

              Tile should be easy to clean, strong, sturdy and stain resistant. Tiles in wet area like bathroom should be of anti-skid floor type.

              Tiles consumption per sq.ft built up area (BUA) is 1.3 sq.ft. Tiles contribute about 8.0% of total material cost.

              7. Paints:

              Paints can be broadly classified into water based or solvent based. They come in thousands of shades and gives multiples finishes like Matt, satin and glossy finish. Certain Paints also have washables, anti-algae/fungal, crack bridging properties.

              When selecting an interior paint, try choosing water-based paint instead of oil-based gloss paint. Water-based paints have less odor than conventional oil-based paints.They are much easier to clean up and are durable.

              When selecting an external paint look for waterproofing, anti-algae, and dirt pick resistance properties.

              Paints (Internal- Emulsion and external grade) consumption per sq.ft built up area (BUA) is 0.18 liter (0.14 liter for internal painting and 0.4 for external painting).

              Paints contribute about 4.1% of total material cost.

              The Finishers (Bricks, Tiles, and Paints) collectively contribute 16.5% of total material cost.

              8. Fittings Category:

              Window, Door, CP Fittings, Sanitary wares, Plumbing and Electrical fittings when combined contribute to 23% of total material cost considering budget brands. Top brand options may increase this category cost to 30 – 35% of the total cost of construction. Fittings can be selected based on one’s requirements and choice. In branded fittings quality should not be a concern.


              Other than estimating the cost and quantities of construction materials, one should also have knowledge of current labor cost in local markets. This is because the labor component constitutes to 40-45% of the total cost of construction of a house. An unskilled labor charges Rs. 350 to 400 per day whereas skilled labor such as mason, carpenter, painter, electrician etc., charges between Rs. 800 to 1000 per day. The total cost of construction (including both design, material and labor) per square feet may vary anywhere between Rs.1250 and Rs.2500 per square feet depending on the specifications of the building materials you choose for you house.

              Now that you have the total cost of construction, you can start sourcing the funds required for the project. Your source might be personal savings or loan from banks/ friends. Although this sounds like a naive step, lack of resources during construction might sometime over shoot the budget. Contractors will charge for De / Re-Mobilization. Some of the construction materials like Cement etc., might expire/loose its strength if the project is delayed by long. So sourcing the funding before the start of the project is just as important step as any other. A detailed cash flow for purchasing construction materials has been shown in the info-graphic to ensure smooth construction flow with time.

              This is a guest post by Vinod Kumar Singh

              Friday, June 30, 2017

              World's leading architects - Series 1

              Dear readers, from now on, we will be presenting a series of leading architects and their works spread across the world. In the first edition, we present Sir Norman Foster, a British born architect. Here is the info-graphic showcasing his projects.

              Other leading design houses, architects, consultants looking to reach out to wider audience can submit their entries at nirrtigo@nirrtigo.com


              Saturday, June 24, 2017

              Is Investing in Real Estate a Good Investment Option?

              Real estate is among the few investment options where the asset value is almost always on the rise. Unlike shares and stocks, the risk element in real estate is much lower. Also, the additional income that one can earn by letting out a property can give a major boost to one’s livelihood and lifestyle. Investing in real estate is definitely a wise way of using one’s money and multiplying it.

              While putting money in shares and bonds are popular methods of investment, the returns on investment cannot be guaranteed always. Changing market and political scenarios can have a major impact on the value of these assets. The economic scenario at present is replete with uncertainties like fluctuating inflation and job-market instability. In times like this, it is important to find alternative means of taking care of your financial security. Real estate, unlike equity and debt markets, is far less affected by external factors like politics, and is, therefore, a much safer investment option.

              However, investing in real estate implies a huge monetary commitment. Therefore, a lot of advance planning is necessary to zero in on any property. Moreover, your job doesn’t end at just buying a property. For example, if you’ve purchased a house for renting out, you need to first take adequate care to maintain it well and beautify it so that it finds takers. Thereafter, you need to keep checking on how the tenant is maintaining the house. After the tenant has moved out, you would need to hunt for another, and before that, renovate or repair the house as may be needed. And, the bigger the property, bigger is the responsibility and higher the maintenance expenses. These days one can also hire a Property Management Company in India. These companies take care of tenant management, maintenance issues, and timely payments of bills. Be it a budget villa in Bangalore or a duplex flat, the commitment to investing, earning, and maintaining is the same.

              If you’re looking to rent out a new house property for some additional income, it would make sense to go for low-cost properties in areas that are fairly well developed. The idea is to offer attractive properties at decent localities that will generate interest in prospective tenants. This way, you don’t have to invest a very huge sum of money, and you can get a fixed income once all the relevant repair work and paperwork for renting out are done.

              Before setting out on deciding on a property to invest in, it is important to check on certain basic criteria. Analyze options as you would if you were looking for a place to stay. Which aspects would you consider before deciding on a place for yourself? Proximity to basic facilities and amenities is a primary concern for those looking to buy a house. The same goes for those looking to take a place on rent. Similarly, locations where major infrastructural projects are being executed may not be preferred options during the time of construction. Prospective tenants would not go for places located in noisy and polluted areas. Eventually, however, once the infrastructural works are done, the same property may be in demand and fetch a good rent. So, you would need to think on more than just the price and your budget before deciding on a real-estate property.

              This is a guest post by Dinesh Dawde.

              Monday, June 12, 2017

              How will Real Estate Regulatory Bill (RERA) help home buyers in India?

              Real Estate Regulatory Bill (RERA) has been passed and is now being implemented at state levels. How will Real Estate Regulatory Bill (RERA) help home buyers in India? Here is quick look:

              Monday, June 5, 2017

              The Effect of GST on Indian Real Estate

              The implementation of the Goods and Services Tax (GST) is expected to bring about a major transformation in the taxation structure of India. Currently, the central and various state governments impose taxes on the manufacture and purchase of goods and services. The all-encompassing GST is supposed to do away with the various taxes that burn a wide hole in people’s pockets and prevent double taxation. At present, consumers bear a 25–30% of tax burden on purchase of goods. GST is scheduled to come into force on July 1st this year.

              As much as the benefits of this new tax regime are widely spoken about, it is still not clear how GST will impact the real-estate sector, especially low-cost and affordable housing.

              Real-estate experts across seem to be trying to get their heads around on how this sector is expected to get impacted by the implementation of GST. The three primary taxes that are levied in this sector are Service Tax, Value Added Tax (VAT), and Stamp Duty. GST is expected to replace the first two, while the third one remains as is.

              To understand this GST - real estate conundrum, we shall break down the components of taxation in the sector. Firstly, let’s understand that Service Tax, which goes to the central government, is applicable for only properties that are under construction. This tax is levied on a percentage of the total price of the said property. Land cost is not included in the calculation of Service Tax. Hence, currently there is a 75% abatement on under-construction properties valued at less than Rs 1 crore and 70% on such properties that cost more than Rs 1 crore, like high-end luxury apartments in Bangalore. In both these cases, Service Tax is calculated on only the remaining 25% and 30% of the gross value of the property.

              VAT too is applicable on properties that are being constructed, but are payable to the state government. This tax is levied on the sale of the house property and involves the transfer of ownership to the buyer. However, this tax structure varies from one state to another, in the range of 1–5%. Experts are of the opinion that the implementation of GST will not only simplify the tax structure in real estate, but also reduce the scope for litigation.

              Stamp duty, which is not going to be included in GST, is calculated as a percentage of either the agreed value of the property or the minimum price at which the property can be transacted, depending on which value is higher. Some experts believe that stamp duty is a good revenue-generator for state governments and is therefore kept away from the ambit of GST.

              Going by the understanding of GST vis-à-vis real estate, experts believe under-construction properties to be pretty expensive after July 1, 2017. Nevertheless, they suggest to wait and watch until the designated date to see the rate of GST to be implemented and its resultant impact on real-estate prices before making conclusions.

              This is a guest post by Dinesh Dawde

              Monday, May 15, 2017


               Image source: www.propertyportalwatch.com

              Dealing with the real estate finance and property matters is an uphill battle. You never know which move will make or break your future plans. Especially for the first-time dealers or the new beginners, the real estate dealings are a learning road. The investors step into this new world of investments and weigh the pros and cons of various property deals against each other. Once they are fully satisfied and have talked to their agents and lawyers, it is only then that they get into a contract with the seller. Even then, the beginners and even professionals tend to make unforeseen mistakes at the time. But, through thorough research and learning, they can do their best to avoid the common pitfalls that can be disastrous.

              Here are the common mistakes that can be avoided easily if one has some background of financial and real estate guidance. The mistakes are as follows:

              • Lack of research

              Image source: jllapsites.com/real-estate-compass

              Most of the investors while dealing with property do not know everything that they should. The real estate agents take advantage of this fact and there’s a high chance that they’ll allure you into making less beneficial deals. This is where your knowledge and a good support system are required.
              The lack of research can be in choosing the right location or in financing (discussed ahead). Many new investors ask very few questions regarding the property they are shown. This is a big mistake! You should ask everything about the place. How investing there is beneficial? What facilities does it offer and a lot of other things? Say if you are interested in investing in the property located on the Al Marjan Islands UAE, wouldn’t you ask about the other UAE islands and the other potential areas? You must approach every possibility that you can.

              • Not having a strong financial approach

               Image source: realtybiznews.com

              The property investors, home buyers, building renters, everyone must have a strong financial background. The dozens of mortgages offer, loan plans and financial funds are available in the market with the purpose of helping the investors purchase what they want. Here, sticking with the budget you have is very important. Some of the investors are attracted to homes and buildings with a higher price. As a lot of other expenses should be taken into account before expanding the budget, spending money on such a deal is a waste of your money and time. Other bad investments include those with a high-interest rate, high monthly payments, and balloon payments.

              • Giving up easily on negotiations

              Image source: lehmbergrealty.com

              Good communication and negotiation skills are a trump card in the real estate dealings. You need to have a strategic approach if you want to get a good deal and negotiations play a very important role here. To excel in this domain you need to learn the basic techniques and tricks of property dealings. What many investors here do is they give in easily to what the agent has said. Even if they aren’t satisfied with the deal, they fail to negotiate with the agent. Then the end results, in this case, aren’t good enough. This is why you need to learn how to negotiate or at least know the basics of the essential things and how to talk about them before signing the contract.

              • Miscalculating the repair costs

              It’s not only the property land or the building that costs you your life savings but also the repair cost that most of us ignore to consider. The repair cost is the money one has to spend, after buying the property, on the maintenance of the building. Everything from the repair of the lost connections to painting, lawn care, the furnishing of the place and few other important tasks are included in the post-property buying expenses. A buyer must consider these and make sure he doesn’t go out of cash so that he could fix these issues as well.

              • Ignoring the due diligence period

              A due diligence period is the right of every buyer and those agents who don’t give it or keep it short must be stopped. As the buyer, you are responsible for the deal you are making and you must keep a reasonable due diligence period before finalizing the deal so that you have a chance to end the deal if you find some problem in it. During the due diligence period, you should hire a third-party proper property inspector who looks into every aspect of the house and analysis it. Estimate the repair cost and check whether there is any other issue or not.

              Real estate investment is tricky but not impossible. If you follow the proper guide and avoid the common pitfalls we have mentioned in the article, there’s a higher chance that you’ll succeed in making your very first potential deal. Keep your head high and be attentive during the whole process. This is what it takes to get a good deal.

              This is a guest post by Rachel Stinson who has always had a knack for writing, food, fashion, and places. Blogging has combined all four for her with an added bonus of enthusiastic audiences. She expertly analyzes real estates and restaurants with respect to pricing and people involved and can express her opinions in an unhesitating, engaging manner. 

              Monday, May 1, 2017

              Why Home Loan Interest Is Too High for Indian Buyers?

              A recent survey carried out by the Indian Mortgage Guarantee Corporation IMGC-Kantar IMRB showed that high housing loan interests and lack of savings are factors that discourage Indians to own a house. According to the survey, borrowing money is another constraint for people that prevents them from investing in a new property. The survey also revealed that the younger generation (25-44 years) is keen on buying affordable houses in smaller towns than metropolitan or mini-metros.

              Conducted in two phases, this survey had a sample size of about 4,100 respondents from towns, mini metros, and metros. These respondents were people who had opted for a home loan. The age group was segregated into 25-34, 35-44, and 45-55.

              At the launch of the report the MD & CEO of National Housing Bank, Sriram Kalyanraman said, "Housing sector is poised for higher growth, especially in affordable housing segment by the Housing-for-all by 2022 Mission and infrastructure status accorded by government, apart from various other measures,"

              As high as 38% participants of the survey had the same opinion that the home loan interests are too high. An equal number of people gave the reason that their savings aren't enough to meet the expenses of buying a new home. Other factors listed in the report were higher property rates and insufficient loan availability.

              The report also pointed out that home ownership delays are being caused due to high dependence on personal savings to pay for down payment.

              When questioned about the progress on Housing-for-all, Mr. Sriram Kalyanraman addressed by saying that apart from the government lending and loan subsidies, many other private developers launched projects under affordable housing. He added, "The full data has to come from private sector. Once we take it, I think we will surely be in line with Housing-for-all by 2022." Furthermore, he shared that presently small-sized houses of about 500 square feet are in great demand.

              It is also believed that demonetization has led to a fall in the property prices. This fall is indicative that it is the right time to invest in properties in various cities. Buying apartments in Bannerghatta Roads, Bangalore, or residential properties in OMR, Chennai, or apartments in Hyderabad will become easier for the public.

              Mr. Sriram Kalyanraman also believes that prices are sure to come down and demonetization has helped a lot of clients. In addition, there is far more transparency in the buying and selling of houses in the INR 15-20 lakh segment.

              The report also stated that many Indians still live with their parents, than in a rented place or self-owned house, which shows their financial dependence. Amitava Mehra, the CEO of IMGC said, "There is a gap in the market. These can be managed to a large extent by mortgage guarantee backed loans. With availability of higher loan to value (LTV), Indian home buyers can achieve their home buying dream by not relying solely on personal savings."

              This is a guest post by Dinesh Dawde.

              Friday, February 3, 2017

              The new happening destination Yelahanka

              Yelahanka is one of the most happening cities to the north of Bangalore. Yelahanka is on the verge of being the prime real estate hub in North Bengaluru owing to its vast undeveloped areas and easy access to the Kempegowda International Airport. This locality has seen remarkable developments since its inception. It was once known to be a town which did not exist on the maps of Bengaluru. The transformation has been slow and in a paced manner. But the appreciation of property and land value is remarkable.

              Yelahanka has an excellent connectivity be it by road, rail and air. The road network to Yelahanka is one of the best in entire Bangalore. Yelahanka railway station is one of the oldest stations setup in Bangalore area and has railway lines connecting KR Puram and Bayappanahalli in the east and Yeshwanthpur in the northwest. If these tracks are improved and daily city passenger trains are introduced, a big part of traffic congestion will be eased as more people will use trains. Since the tracks already exist, it is better to use the existing infrastructure rather than investing in new activities like Metro. Kempegowda International Airport is located off Yelahanka. Government has taken initiative to develop this area on a large scale by making sure north Bangalore is suited to develop and flourish as a Business Hub.

              Witnessing the huge growth of Devenahalli Business Park, a rail system is to be set-up that will connect Devanahalli with Yeshwantpur via Yelahanka. Widening of the NH-7 up to the airport from the existing six lanes to eight lanes (currently under process) will result to be next major infrastructural advantage to this area. With the development of this, there will be an Inter-modal Transit Hub at Yelahanka. Yelahanka is peaceful and traffic free compared to all other areas that provide well equipped locality to live in. Good social infrastructure is present here with a number of multi-specialty clinics and hospitals, reputed schools and colleges, among others. The area has a lot of room for good capital appreciation as property prices are currently affordable as compared with most of the CBD areas. Prices are relatively affordable.

              Investors are considering buying property for sale in Yelahanka for long-term investment as prices are expected to appreciate. Demand for housing mostly comes from those employed in North Bangalore, especially employees at business parks like Kirloskar Business Park and Manyata Tech Park. This area is more affordable with property prices approximately around Rs 4,700 per sq ft. Large scale infrastructure development is proposed around this stretch that would further enhance market as an investors’ destination. There are three proposed IT parks in and around this region and a proposed four-lane state highway that would connect this stretch to major parts of the city.

              There are several benefits to investing in Yelahanka. The availability of infrastructure that ensures good connectivity is definitely a plus point. For those working in the area, being close to work place is an added advantage. The presence of good amenities at a short distance is ideal as well. Of course, one of the key benefits is that property in the area is still in the affordable range as against other property for sale in Bangalore. This area is great for long-term investment.

              This is a guest post by A. Ramya

              Tuesday, January 17, 2017

              Why 2017 is Likely to Be a Good Year for NRI Property Buyers

              Non-resident Indians from all over the world have been fascinated with Indian real estate market. However, they are bothered by the lack of transparency and ways in which business dealings are conducted in India; especially when information is withheld deliberately from the buyers, and there is a lack of scientific process of due diligence. With several key policy changes in 2016 such as demonetization, Real Estate Regulation Act (RERA), the Goods and Services Tax (GST), and the Benami Transaction Act, the debate now is if the NRIs will be interested in investing in the nation.

              Here’s why NRI property buyers should invest in Indian real estate in 2017:

              Firstly, there are many ready possession properties built at prime locations such as Bangalore, NCR region, Chennai, etc. There are many luxury villas in Bangalore and 2 to 4 BHK apartments in NCR that are ready to be sold. Secondly, India is expected to keep its place among the fastest-growing economies in the world, with the real estate sector steering the wheel. Furthermore, policies like Goods & Services Tax, Real Estate Regulatory Act, Real Estate Investment Trusts, Benami Act, and demonetization are expected to bring about transparency in the sector. Lastly, the amended rules and regulations will ease up the purchasing process. Relaxation of laws by the Reserve Bank of India for NRI buyers is also a major benefit.

              Naushad Panjwani, the managing partner at Mandarus Partners LLP, believes that the Indian realty has major credibility issues largely due to the absence of effective regulator, which is present in other sectors (TRAI, IRDAI, SEBI, etc.). He also believes that some other reasons that hold back NRIs to invest in India could be the shortage of funds for projects, the delay in the disposal of court cases, the lack of title insurance and nexus among politicians, developers, and bureaucrats. Panjwani says, “All of these factors kept good business houses away from the realty sector, and the industry as a whole was characterized by many unscrupulous elements. However, things have started to change slowly. The Real Estate Regulatory Act (RERA) and easing of inflow of funds in the form of Real Estate Investment Trusts, External Commercial Borrowings, and Foreign Direct Investment, have attracted the attention of reputed business houses and customers alike.”

              The Chairman Emeritus of Sobha Ltd, Mr. PNC Menon believes that Indian realty sector has reached a stage where it offers NRIs a range of options to invest in, from affordable to mid-range to luxury properties. Menon said, "With greater transparency, tighter regulations, more affordability and enhanced price stability, Non Resident Indians will find interesting property investment opportunities, as long as they have a long-term view and are discerning about which realty project to invest in. India is a huge market with over 1.2 billion people and an emerging economy on a global front,”

              Rustomjee Group’s brand custodian and chief customer delight officer, Mr. Kaizad Hateria has expressed his opinion that moves like demonetization will bring about transparency in the real estate sector and minimize unaccounted cash dealings. He said, “Greater transparency, will improve the element of trust in the Indian property market and this will make Non Resident Indians more confident about investing in properties in India.”

              The marketing director of Sheth Creators, Hiral Sheth mentioned that realty sector has come a long way by becoming the second largest employer in India. Number of rules and regulations have been amended to ease the process of home buying as well as commercial property. Sheth said, “Factors like Foreign Direct Investment in the realty sector, relaxation of laws by the Reserve Bank of India (RBI) regarding property buying by Non Resident Indians and lenient policies via-à-vis the Foreign Exchange Management Act (FEMA), have accelerated real estate investments. Also, the availability of affordable properties, attracts a large number of urban Non Resident Indian buyers from across the globe.”

              Industry experts believe that 2017 will be a good year for NRI buyers to invest in properties. New policies that will boost transparency and rules that will simplify the property purchasing process are the main reasons for attracting NRI buyers.

              This is a guest post by Dinesh Dawde

              Saturday, January 7, 2017

              DIYs that can increase the value of your home

              Every home once in a while has to go through some improvisations to increase the value of the house. It is more so if you are looking to rent or sell your property. Some physical changes and improvements can add to the appeal of your house and make it look more attractive. A fresh coat of paint, some new wood work inclusions etc. can be a good start to home improvisations. But if you are looking to do some value additions without spending much, you can try some of the DIYs listed below.

              To make a house look more elegant and bright, light color drapes paired with white upholstery and white based furniture pieces are the key. So you can start off by changing the curtains. De-stain any old wooden pieces and re-stain them according to the color tone of the room. Few other economic changes would be to either steam vacuum the carpets or change over the carpets to lighter shades. Lighter shades of carpet make the house look big and elegant. Symmetrical patterns on the back-splash of the kitchen counter, stairway railing and verandah railing will make the house look organized and high fashioned. Keeping the kitchen counter top clear of unwanted items will make the counter seem big and attractive.

              Bedrooms are the biggest appealing points when considering a home. Big beds with neatly laid white and fresh linens are biggest attractions. Symmetrical arrangements of the bed with side tables and other furniture pieces in the room gives the room a sense of space. Similarly white sheer curtains and drapes make the room seem brighter. You can customize the door and cupboard knobs by painting them all in a same tone of metallic shade. These metallic shades make the home appear custom made and add value to the property. Landscaping in the backyard or merely adding some greenery to your terrace garden will show detailed touch in the house. Every buyer or renter want to see a personalized touch in the house they are looking. Creating a specific purpose for each space in the house will show how each space can be efficiently utilized. Even if it is not utilized the same way as yours, it throws opportunities and ideas for much more use to the space.

              Use of energy efficient fixtures and appliances adds as a huge advantage when trying to put the house on the market. Energy efficient incandescent light bulbs, power saving smaller appliances will be looked up as a huge saving on a long run. Adding additional storage outside of the house in the garage will also be considered a value addition. Leaving these additional storage half empty will make the storage space seem more and will help the buyer visualize how much the storage space can accommodate. Every home improvement once started must be completed to satisfaction. Refrain from taking bigger home renovation projects if the deadline seems too tight. Consider the use of the particular update or renovation in the long run and foresee how it will add value to the house before implementing any changes to your home.

              This is a guest post by A. Ramya

              Wednesday, December 28, 2016

              Top 5 Lighting Ideas to Light Up your Rooms like never before

              Not everyone understands how far proper lighting can go in enhancing and transforming the look and feel of interiors of a house or an office. A careful planning with respect to lighting can add a lot of aesthetic values to the looks along with serving its functional purposes. Any of the interior architects in Bangalore can vouch for the fact that a properly-lit room can offer a much peaceful and calm atmosphere.

              If you have plans to change few bulbs here and there at your residence or office or if you are looking forward to an extensive overhaul of your space then consider these 5 lighting ideas that can literally transform your rooms for better.
              1. Chandeliers- There are few things to chandeliers. They are clichéd, they are costly and they are still a must if you really want your living room to be beautifully and uniformly lit. Most people see chandeliers just as props to beautify their spaces, but these lighting objects are also very functional as they help you get rid of those corner shadows in the room. A crystal chandelier can add elegance or a metallic one can offer great visual treat. These light fittings often come with dimmer levels to use them as per your needs.
              2. Recessed light fittings- If you don’t want your entire living room bright but just want to illuminate one particular section of it, then, recessed lighting is the answer for you. You can typically find fluorescent, halogen or incandescent bulbs outfitted in these lighting devices. There are usually dimmers attached to it that can be used for decreasing and increasing the illumination and thus changing the ambience in the room in less than a second.
              3. Task lighting- Now you may confuse this with recessed lighting as these are also used for illuminating specific areas in a house but for specific tasks and not necessarily just to create pleasant ambience. Perfect examples would be lights above the dresser, study lamp, table lamps etc. They can be typically found in the form of pendants, portable lamps, track lights etc.
              4. Funky cabinet lighting- Being in kitchen and preparing dishes can be all the more fun with some funky lighting embedded in different cabinets. It is practical and also one of the very smart ways of making your kitchen exciting. Whether it is the kitchen counter top, the cabinets or the exhaust, these light fittings can make your job simpler. Consult one of the home interior designers in Bangalore to learn more about these cool and practical lighting solutions for kitchen and other cabinets in your home.
              5. Bedside lighting- A little lighting along the bedside can help all of us, especially if you like reading your favorite books right before sleeping. There are many options like bedside lamps, wall-mounted ones or floor lamps that you can choose from. All these often come with a dimmer to regulate the intensity of lighting.
              While many home or office owners are driven by lighting options and solutions available in the market, many others approach it one space at a time. Hiring one of the best interior designers in Bangalore can help you get over this confusion.

              The trends in home lighting solutions keep changing year after year, but at the end it boils down to how comfortable and peaceful ambience can they create inside the spaces you live in. Office lighting is equally important as right lighting can keep the workforce pepped up and in good mood, which in turn can help any business.

              This is a guest post by Bharath Joshi

              Tuesday, December 20, 2016

              How to Apply for SBI Home Loan Online

              State Bank of India (SBI) is the largest and one of the oldest public sector bank of India. It started its banking business in India in the year 1806 with a market share of 20% in deposits and loan in the banking sector. SBI has been ranked at the 232nd position in the Fortune Global 500 list of the year 2016.

              SBI and its five associate banks have a comprehensive list of banking products and services that they offer to their customers through its wide-spread branches all over India. They offer products to residents as well as non-resident Indians. Apart, from banking products, SBI and its associates offer products like insurance, credit cards, fund management and investment in capital markets as well.

              SBI Home loan:

              SBI is one of the largest providers of home loans in India. With their comprehensive list of different kind of home loan products, they have something that meets everyone’s expectations. SBI was voted as “The most preferred home loan provider” by the consumers themselves in CNBC Awaaz Consumer Awards. The easy to avail, transparent and trusted SBI brand of home loans are better than any other home loan products in the market.

              With a market cap of Rs. 190,000 crores and total outstanding loans of Rs. 11 lakhs crore as on March 2015, SBI stands at the leading position well ahead of the private sector banks in India. This is at least in part due to their innovative products and competitive interest rates.

              Features of SBI home loan:

              1. SBI home loan is available with minimal charges;
              2. Interest is charged on daily reducing balance at very low rates in comparison to similar products available in the market;
              3. They offer the loan with no prepayment penalties. So, if you have surplus money, you can prepay the loan anytime and reduce the interest burden at no extra charges;
              4. Apart from loans, their home loan products come with other exclusive benefits as well;
              5. No hidden costs and charges;
              6. With such a widespread network of branches and the online facilities, the loan can be availed from any part of India easily.

              How to apply for SBI home loan:

              SBI home loan can be applied by visiting any branch of SBI as well as through the online route at just a click of the mouse. SBI recently started the online home loan application process which helps customers check their eligibility and find a quote in accordance with their requirements.

              Firstly, the customer needs to fill an online form to get an instant e-approval. After that, the bank officials shall visit the customer to complete all the penalties. Also, the customers can upload all their documentation online. This has helped in reducing the processing time considerably and made the whole process customer-friendly.

              SBI home loan products:

              SBI offers a variety of home loan products designed to meet everyone’s requirements. Here are few of the home loan products offered by SBI:
              • Home Loans: This product is offered for buying a new home, buying a pre-owned house, and for the construction of a house;
              • Loan for earnest money deposit: This loan can be availed to finance the earnest money requirements to book a residential plot or a house property that us sold by government housing agencies or housing boards. This loan can be repaid by the housing loan availed from SBI later;
              • Takeover home loans: this loan facility allows customers to shift their existing home loan from any other commercial, public, private, housing finance company or foreign bank to SBI;
              • Tribal Plus scheme: this is a specialized scheme for people living in the hills or tribal area of Northeast India and areas around Bhopal, Lucknow. Chandigarh, Patna, and Bhubaneshwar;
              • SBI Privilege Home loan: This home loan product is specifically meant for government employees;
              • SBI Shaurya home loans: only defence personnel can avail a home loan under this category;
              • Her Ghar: As the name suggests, this home loan variant is exclusively for women home owners and is offered at a concessional rate of interest;
              • FlexiPay home loan scheme: Availing a loan under this scheme, help young professionals reduce their financial burden by repaying the loan in easy installments.
              • NRI loans: SBI has special home loans to cater to the needs of NRIs.

              SBI home loan interest rates:

              SBI offers home loans at very competitive rates in comparison to other banks. Presently, it is offering home loan at the rate of 9.15% onwards depending upon the product you choose. Whereas, SBI home loan concessional rates that are offered to women start at 9.10% onwards.

              Eligibility criteria and documentation required for availing SBI home loans:

              Eligibility criteria and the documentation required depends upon the employment status of the person who is applying for the loan. Here are the requirements that are needed to be met for availing the loan:
              • In the case of salaried employees:
              If the applicant is serving as an employee with a company, then he needs to be 18 years of age to a maximum of 70 years to get their home loan approved from SBI. The minimum income should be at least Rs. 1.2 lakhs p.a. to avail a home loan between Rs. 5 lakhs to a maximum of Rs. 1 crore. The loan can be repaid in 5 years to 20 years. The applicant should be working for at least 2 years with the current organization in order to be eligible for the home loan.
              • Documents required:
              • Application form with photograph
              • Residential and identity proof as accepted by bank
              • Salary slips for the last 3 months
              • TDS certificate, i.e. Form 16 of the previous year
              • Salary Account statement for the last 6 months
              • A cheque for the home loan processing fee.

              • In the case of a self-employed person:
              If the person is self-employed, then he can avail a loan when aged between 21 years to 70 years. Minimum annual income of Rs. 200,000 is required to be eligible for the home loan. A loan of Rs. 500,000 to Rs. 2 crores can be availed by a self-employed individual and this can be repaid within 5 to 20 years’ time. The applicant should have been in the same business or profession for at least last 3 years in order to qualify.
              • Documents required:
              A majority of the documents required to be submitted by a self-employed individual are similar to those that need to be submitted by a salaried applicant. The documents that are specified to self-employed professional and businessmen are as follows:  
              • Educational certificates
              • Proof of business existence
              • Certified copies of income statement and balance sheet for last 3 years
              • Bank statements for last 6 months
              • A cheque to cover the applicable processing fees

              Presently, there are no processing fees on SBI home loans if it is being transferred from a different lender to SBI or if the loan is being granted for a SBI approved housing project.

              This is a guest post by PaisaBazaar Team

              Friday, December 16, 2016

              Reasons Why Demonetization Has Brought about the Right Time to Invest in Real Estate

              Much hype is created around the demonetization of the currency and its effects on the real estate sector. The fear that the real estate sector will suffer immensely as a consequence of this decision is, however, unwarranted. In fact taking long-term perspective in account will help us see that demonetization will actually bring some positive changes.

              Thanks to the demonetization, India will witness transparency and organized ambiance. From a home buyer's view, this is a welcoming change, as it will place him in a stronger position with so many benefits to reap.

              Top reasons why you must invest in realty sector (post demonetization).

              • Demonetization has accelerated the flow of money into banks. This excessive money will allow the banks to give out a loan at a cheaper rate of interest. People can avail home loans with ease to build their dream homes.
              • Projects that were earlier delayed on account of lower cash will now speed up. Increased cash flow with banks would also facilitate industries to avail loans at better lending rates than what was being offered earlier.
              • Better liquidity has resulted in deflation, which in turn has given rise to price stabilization, hence making it a buyer's market. The Reserve Bank of India has more than enough expanse to lower the REPO rates now. If the banks have liquidity, it will help them convert the REPO rate into reduced borrowings for home loans. The rupee is also expected to become stronger in the coming few months, thus increasing the purchasing power of customers.
              • Investment in infrastructural construction - Demonetization will lead to a surge in the percentage of money accounted for which will result in an increased collection of taxes. This means the government will have much more resources to invest in infrastructural constructions in India. This will be a win-win situation for the consumers who have invested in affordable projects on the outskirts of the town as they will get more connectivity.

              Also, the transformation to cashless economy will make the home buying process all the more transparent and convenient. Therefore, if at all you are planning to buy new apartments in cities like Chennai, Bengaluru, Mumbai, Hyderabad or any other city, keep in mind that this is the right time. The Realty Sector has witnessed a slowdown in the past two years and prices of apartments have dipped by almost 10%.

              This is a guest post by Dinesh Dawde

              Saturday, November 19, 2016

              Home Loan Prepayment: The Whys and Hows

              A few years ago, Misha took a large home loan, at a monthly EMI of almost Rs.37,000 and interest rate of 11.75%. She still has to pay close to Rs.26 lakhs of the principal amount with just a little over 10 years remaining. She is looking for options that can help her diminish the loan burden. As home loans are some of the biggest debts we take on during our financial lives, repaying them often becomes a substantial burden on middle-income earners with a fixed salary. However, there are four ways in which you can reduce your home-loan debt—or at least minimize its effects:

              1. Transfer your home-loan to a low interest provider: If Misha transfers her home loan to a lender who levies 10.5% interest instead of 11.75%, her loan tenure comes down drastically. If she maintains the same monthly EMI, the reduced interest brings the tenure down to 113 months from 124. The longer you spend repaying your loan, the more interest you have to pay—therefore, Misha will save approx. Rs.4 lakhs in interest.

              2. Increase your EMI and reduce the tenure: This can be availed only if your financial situation changes substantially. For example, you had been saving for your child’s education, but she has already left for college. Or your salary has been hiked by 30% or more. Suppose Misha pays Rs.42,000 a month instead of Rs.36,407 a month— her interest tenure comes down to 96 months from 124, as a result of which she pays Rs.476000 less in interest.

              3. Make prepayments: Prepayments are payments made towards your loans in large chunks, and at irregular intervals. Here are the basic ways in which they differ from EMI payments:

              • EMIs are compulsory and regular. You pay them every months, and you pay a fixed amount. While this amount can be changed, there is not much flexibility. Prepayment, on the other hand, depends entirely on the loan taker
              • Prepayments are much larger than EMIs, for example the average home loan EMI can be anywhere between 10,000 and 50,000, while prepayments are numbered in lakhs.
              • The most crucial difference between EMI and prepayment is that a large portion of your EMI goes towards payment of interest, at least towards the beginning of the loan tenure. Prepayments, however, go directly towards your principal, thereby bringing down not only the loan tenure, but also the outstanding loan amount.
              If Misha makes prepayment of Rs.2 lakhs for 5 years, alongside her regular EMI of Rs.36,407, her total interest will drop by a staggering Rs.8.5 lakhs and her loan tenure will be almost halved— from 124 months to 73 months. Obviously, out of the three options for reducing the home-loan burden, making prepayments is the most profitable one. But while going down the prepayment route, there are a few things you must note:
              1. You will have to pay interest when you are making a prepayment, i.e. the day you make the payment, your principal will decrease and from that point on you will be paying interest on the reduced principal. But suppose you make a prepayment on the 10 of the month— the interest on the original amount for those 10 days will have to be paid as well.
              2. Some loan providers insist on validating your proof of income before accepting prepayment, as these are usually big ticket payments. Therefore it is advisable you carry bank statements for the account from which you are making the payment, dating back to at least three months.
              3. The longer you take to repay a loan, the more your loan provider will earn. Therefore, accepting prepayment is often not in the best interest of the bank, so there might be measures like prepayment charges and limitations in payment mode. There may be a specific period after loan disbursement during which prepayment is not permitted. Also, the borrower may have to be present personally to make prepayment. Acquaint yourself with these rules and regulations before you take the leap.
              4. Once your principal loan amount decreases, your CIBIL score (which reflects your credit worthiness) will improve. Follow up on your credit score within a few months of making the prepayment, to ensure that the reduction in outstanding balance is reflected.
              5. Make sure to preserve the acknowledgement of payment. This document contains important details such as outstanding principal, home loan tenure, and change in EMI (if any).
              The catch is, prepayment is possible only in case of a sudden financial windfall, such as yearly bonus or inheritance or gift. Then you would have the dilemma of whether to invest it and increase savings, or whether to prepay your loan and reduce your debt. Our advice is, if the rate of interest from investment is less that the interest you pay on your loan, it is better to make a prepayment. For example, investing in a provident fund would fetch Misha interest at 8.8 currently, while her loan interest rate is 11.75. Therefore, making a prepayment makes better financial sense.

              This is a guest post by Team Paisabazaar