Monday, September 16, 2019

What is the process of securing a home loan in India? What are the things I should check before opting for a home loan provider? And what are the various kinds of home loan schemes available in the Indian market?

Author: Sachin Gupta | Find me on Twitter 

In the previous post, we discussed about the dilemma of renting versus owning. However, after an in depth analysis of various elements described in the post, Sumit Sharma decided to go ahead with the purchase of the apartment. Now, the next step for him was to arrange for the mortgage loan to finance his purchase. Without a doubt, there are numerous lenders (mostly banks) in the market willing to lend money at competitive prices. Which lender (bank) to choose? What type of home loan to avail? And what are the things to remember during the loan process? These are some of the serious questions Sumit Sharma was confronted with. Lets Break It Down to smaller elements (L BID) and hope Sumit Sharma makes an informed decision based on the understanding of following elements:

Things to check during a mortgage loan process:
Interest Rates:
As per the RBI guidelines, home loan interest rates are linked to bank's base rate. Base rate tends to move up and down depending upon the interest rate movement in the economy. As a buyer, check the interest rates from various banks that are offering the similar mortgage loans. Usually premium charged by banks can be negotiated with the chosen bank; however, it depends on your credit history. Since, banks are in the business of lending money, therefore being a customer one must exercise the customer power and negotiate a best possible interest rate with the bank.

Processing fee:
Normally processing fees include statutory costs, third party charges, and additional finance charges. Because of problems involving loan fees and the potential abuse by some lenders of charging high fees to borrowers, a legislation requires lenders to show annual percentage rate (APR) being charged on the loan to the borrower. For example, if the fixed interest rate charged by a bank is 12% and processing fee is 2%, then normally APR would be 12.25%. Processing fee charges can also be negotiated with the bank.

Prepayment penalties:
Many borrowers mistakenly take for granted that a loan can be prepaid in part or in full anytime before the maturity date. This is not the case; if the mortgage note is silent on this matter, the borrower may have to negotiate the privilege of early repayment with the lender. However, many mortgages provide explicitly that the borrower can pay a prepayment penalty should the borrower desire to prepay the loan. Prepayment penalties are not included in APR.

Types of mortgage loan:
Fixed Rate Mortgages - Constant Amortization Mortgage Loan (CAM):
In this type of loan, the interest rate remains fixed during the tenure of the loan. Here, constant principal amount is amortized (reduced) in each installment. The user has to pay the sum of constant principal amount and interest that is charged on the principal. For example, on a loan of say 12 lacs rupees for 10 years at an interest rate of 12% per year, the constant principal amount that will be reduced every month is 12000 rupees (12lacs/120). In addition, for the first month, interest will be 12000 rupees. However, the interest charge will keep on reducing as the principal is amortized every month by constant amount. Therefore, in constant amortized mortgage loan (CAM), the monthly installment keeps on reducing.

Fixed Rate Mortgages - Constant Payment Mortgage Loan (CPM):
In this type of loan, the interest rate remains fixed during the tenure of loan. In this type of loan, monthly installments are constant. Here, principal amount reduced (amortized) in the starting months is less as compared to the principal amount in later months. However, the interest payment is more during the starting months and then reduces in later months. For example, on a loan of say 12 lacs rupees for 10 years at an interest rate of 12% per year, the monthly constant installment will be 17216.51 rupees.

Fixed Rate Mortgages – Graduated Payment Mortgages (GPM):
Some individuals have less income in starting years of their careers; those individuals are not considered for loan. To overcome this effect, lenders have designed a mortgage loan that retains a fixed rate of interest but includes a series of stepped up payments that are lower in earlier years, thereby better matching borrower’s incomes, and then rising over time. These loans are known as graduated payment mortgages (GPMs)

Adjustable (Floating) Rate Mortgages (ARM):
These mortgages provide an alternative method of financing through which lenders and borrowers share the risk of interest rate changes. In this type of loan, since interest rates are adjustable, they are indexed to say wholesale price index (WPI) or other market interest rates. For example, someone who applied for ARM indexed to WPI in year 1 at 5% interest rate might be paying 12% interest rate in 2nd year because inflation has increased by 7%.

Hybrid Adjustable Rate Mortgages:
This is the most common type of mortgage loan used these days. Hybrid ARMs combines elements of fixed rate mortgages for periods of 3, 5, or 7 years, after which interest rates are reset and the loan becomes an ARM. Subsequent payments are usually reset every year for the remaining maturity period. For example, a 3/1 hybrid would mean a three year fixed rate after which the interest rate would become adjustable, tied to an index, and would be reset each year thereafter.

So friends, before going to a bank for home loan, take a look at this blog or even take a print because even if one saves or negotiates .25% on interest rates, processing fee, or prepayment penalties, then it’s worth the effort. Don’t overlook that :)



Have any Questions?
 

Monday, September 9, 2019

Using Tech in the Home - A Video Wall in your Home

Video walls can be an amazing addition to your home decor, as those in the world of business have known for a long time. This is because video walls have been utilized by business people for a long time but they are just starting to catch on in a home setting. Below we will discuss ways in which you can use a video wall in your home.

First, think of the game nights that you can have with a video wall in your home. You and your buddies can play video games on a screen that makes the action truly immersive and will make your game nights the most popular if not in your city then definitely in your neighborhood. Even if you are alone, your gaming experience will surely be at a higher level.

Next, movie night. Family movie nights watching the latest Hollywood blockbusters or even a more highbrow art-house film will be an experience like going to the cinema, with crisp visuals and immersive sound if you invest in speakers and perhaps surround sound. You won’t even need popcorn, as the wow factor of the screen size and visual presence will keep you interested.

Next, your home office. As we have said, those in the world of business have long used video walls. They can facilitate team working, as you and your team will be able to work on a project whilst tracking any changes and ideas on the screen in real time, and the interactive elements of a video can be utilized to improve your business's performance. Having one of these in your home office will also send out the right message to your business competitors.

Of course this is not an extensive list of ways in which you can use a video wall in your home. You probably have other ideas. After all it is your home, not ours!



What are the Real Estate and Property market Terms and Definitions in India?

Author: Sachin Gupta | Find me on Twitter

Looking to buy an apartment in a builder project or a piece of land, Or for that matter, looking to buy/lease office space property? We are sure you will come across many terms and definitions which are new to you and therefore comprehending them is essential to make sure that you are not overpaying.

Take for example, the distinction between carpet area, built-up area, and super area. Most of the builders in India will charge you on the basis of super area. However, in some locations, they may charge you on the basis on carpet area. But the prices will be adjusted accordingly. For example, some builders in Mumbai charges on the basis of carpet area of the property and therefore their base selling price is higher as compared to the builder who is charging you on the basis of super area. Super area is the entire area of the building which includes carpet area, lobbies and corridors, walls, lifts, staircases basements, and other atrium and utility areas. Carpet area is the actual usable area within the walls of the floor. Since, you will using the lobbies, corridors, lifts, and other common areas, therefore, a builder will take all of these into consideration before rolling out the final base price. Whether you pay by carpet area method or by super area, all the charges will be included in the final price.

Similarly, when you go to the local registrar office to register your property, there will be terms like circle rates or market value that will be used to arrive at stamp duty and registration charges. In the below document, one can find all the terms and definitions that are used in Indian real estate and property market.





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Monday, September 2, 2019

Can I time the real estate market?

Author: Sachin Gupta | Find me on Twitter

During the period of 2003 to 2008, property prices appreciated sharply. Land prices almost tripled in most parts of the country on account of faster jobs creation, urbanization, and rising income levels. Were these the only reasons for sharp appreciation? No, says the experts. According to them, real estate is a cyclical industry and at the beginning of the last decade, real estate prices were at their nadir. The coupling effect of sharp GDP growth and cyclical nature of real estate industry resulted in sharp appreciation of property prices from 2003 to 2008.

However, as the world financial crisis hit the world economy in September 2008, GDP growth of most emerging economies started to dwindle. India was no exception and government & RBI brought in policy measures. In fact, the advent of the global financial crisis in 2008 caused resurgence in Keynesian thought. Interest rates were lowered and government provided stimulus (total spending in the economy) to boost the economy. At one point of time, RBI’s repo rate came down to a low of 4.75% in April 2009.

The impact of financial crisis was severe on real estate market. Some of the large real estate developers started offering discount to the tune of 20% in 2008. The sector began to recover on account of government policy initiatives and lowering of repo rate. However, massive government spending and low interest rates during the period of 2009-2011 resulted in inflationary pressures. And the focus now shifted to tame inflation and thus interest rates started to go up and that resulted in decrease in investment by individuals and companies.

In last 2 years, real estate transactions including office space absorption and home sales have come down. The prices have stagnated in most micro markets.



With this in background, can you, the real estate investor really time the market? It’s highly unlikely; however, one can pay attention to the real estate investment strategies, demand drivers, and supply elements.

1. Real estate investment strategies




2. Demand drivers
Following are demand drivers for real estate sector
  • Industry
This is a no brainer; even my grand mom would say prices would appreciate more in cities/markets where there is all the likelihood of work or jobs creation or setting up of industries. Therefore, as an investor one should regularly visit the city development authority’s website and analyze the city’s master plan. A master plan would ideally comprise of the road map for city's development including the setting up of industries, educational institutes, recreational zones, and residential development. At the same time, pay attention to the news which highlight setting up of a particular industry in your region. For example, the driving industries in Gurgaon are Auto and IT and setting up of these industries in 80s and 90s have resulted in real estate boom in the city.
  • Population growth
Growth in population requires development of housing. Other societal changes such as rise in formation of nuclear families, movement of skilled workers from other parts of the country again require development of housing. Analyze the population growth in your city by following census reports along with indicators for urbanization.
  • Income levels
It’s true that setting up of an industry in your region would result in direct and indirect jobs creation which will lead to variety of real estate development. However, pay attention to what kind of industry is this? And what are the income levels of people in your region? For example, real estate prices in Gurgaon have appreciated more because of high income levels of people in the city as opposed to say Bhiwadi (primarily a manufacturing town) where income levels are low.


3. Supply elements
Following are supply elements that affect real estate sector:
  • Interest rates
As explained above, interest rates have direct impact on the supply of real estate. High interest rates bring down the overall supply. On the other hand, low interest rates encourage investment by both individuals and companies.
  • Land availability
Again one should look at the city’s master plan for availability of land. If land supply is limited, it is a good indicator that real estate prices will shoot up faster than expected. And if there is plenty of land available with the city development authority; it will mean price appreciation will be linear. For example, in Delhi, due to limited land parcels, property prices appreciated sharply. However, now, DDA has initiated the land pooling policy and has demarcated new land parcels. It is now expected that availability of this new land will put pressure on existing property prices in the city and city outskirts. Raising the FSI/FAR can also result in softening of property prices. Track those developments.
  • Physical and social infrastructure
One should also pay attention to the existing supply of physical and social infrastructure in the city. In certain cities such as Greater Noida, physical infrastructure is in excellent shape. But property prices have not appreciated sharply. This is because social infrastructure which includes industrial development is minimal.


Equilibrium
As long as supply and demand are in equilibrium, the returns from real estate investment will be linear. Therefore, as an investor, one should look for distortion in demand and supply curves. If demand is expected to be higher than the supply, it calls for investment in real estate to make windfall profits. If supply outdoes demand then it will yield low returns on your investment. 


Can I time the real estate market?
No, it’s not possible to gather data to time the real estate market. Instead, one should solely focus on 3 broad ideas as explained above and only then one should make a bet on real estate investment.

Did you follow these 3 principle ideas for real estate investment?




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