Market Magic

Don't have a penny! You can still buy your dream home

BARUN JHA

"Roti, kapda aur makaan" has been the theme of mankind ever since evolution. Even Adam and Eve began their life together with a bite in apple, which was followed by a dress made of leaves and a cozy abode among the shrubs. However, Adam and Eve had the whole Garden of Eden at their disposal and they did not have to pay the God anything for building their sweet home. Unfortunately, we are not as lucky as our very-first ancestors and we need money and lots of money for even an inch of land that we can say our own and where we can build our own sweet home.

Living in own house has been always a dream that we the Indians cherish the most. Thanks to this dream, the real estate market has been consistently on an upswing and is still going strong. With the prices always surging up above the roofs, an average Indian always feels short of funds for his dream home when he ventures into the market.

However, the economic reforms over the past few years have led to a significant decline in the housing finance interest rates. The southward movement in interest rates, together with tax sops associated with home loans, has made opting for a housing loan almost a must when one thinks of buying a house. So when India's richest man and software major Wipro's chairman Azim Premji wanted to build a house (a palatial farmhouse, to be precise), even he went for a housing loan. Premji draws an annual salary of Rs 2.4 crore and he is estimated to be worth nearly Rs 40,000 crore.

While the likes of Azim Premji have got options of taking a loan for their dream home or financing a many houses just from their salaries, a common man can't even think of these liberties. True, the personal incomes are going northward these days, but so are the expenses. And home loan is the only option for a majority of home-dreamers. Home loan is still the only route that a common man can take to fulfill his dream. And then there are those who want to buy their own home, are eligible for home loans, but can't arrange for the down-payment part, which comes out to be at least 15% of the property value. More than often, this small percentage runs into lakhs and this is no small amount for a common man.

Thankfully, the banks and housing finance companies (HFCs) are more-than-ever ready to happily finance your dreams – no matter whether you are Premji or just another common man. And the "common man" means its literal meaning here, including those who do not have a few lakhs left in their bank accounts to pay for the down payment or a small part of the property cost that one needs to arrange on their own besides the loan.

With the ensuing cutthroat competition in the housing finance market, the banks and HFCs are always going an extra mile to lure their potential customers. While, the lowering of interest rates and hefty discounts are likely to have reached their optimum levels, there are charting new territories to expand their reach. The latest carrot on offer is 100% or more financing or zero down-payment loans for your dream home. However, this is a hidden carrot as yet, thanks to some regulatory constraints, and here we are trying to crack some secret codes to unlock this treasure for potential home buyers.

Full package on a platter

Typically, the banks and HFCs offer upto 85% of the property cost as housing loans. The total cost of the property include various charges as acceptable to the HFCs, such as agreement value of the property, the stamp duty and registration charges, the society transfer charges, garage charges for parking cars, electricity connection and water connection charges, as well as cost of additional furnishings done by the developer or builder, for which an amenities agreement has been entered into between the customer and the developer that has been duly stamped and registered.

However, there are select banks that offer 100% or even more financing for your dream home without any extra efforts from your side. You just need to ask the representatives of these banks or their authorized agents for these offers. On standard home loan products, Citibank claims to offer home loans upto 90% of the property value, the highest from any bank. Lately, Citibank has come up with a new home loan product that it calls "zero down payment loan." According to a loan calculator provided by the bank on its website, a person with monthly income of Rs 30,000 is eligible for a dream home for upto Rs 1,628, 372 with a 15-year loan under this zero down payment plan. Incidentally, the loan amount is same under the bank's standard home loan plan on similar metrics, according to the web-based calculator.

ICICI Bank, a major player in the housing finance market, also offers "Special 100% funding for select properties," claims the bank's website. However, the bank offers only 85% of the property cost as home loans under its standard plans. The bank sources admit, however, that 100% financing is considered in special cases.

You can also find pamphlets and banners from associates of several other banks and HFCs claiming to arrange loans of upto 110% of property value.

Lack funds! Club two loans

While qualifying for special consideration from banks for 100% funding might be difficult for some home buyers, taking another loan is always an easy option to make up for the margin money required to finance your dream home. In personal banking sector, home loan is not the only market that is booming. Banks are also aggressively marketing their personal loan products nowadays. With ever-improving lifestyles of all, personal loans are available for any reason you can think of. Banks don't even ask you what you care going to do with the money, as long as they are sure of your repayment capabilities.

You can always take a personal loan for the 15% of the property cost that you need to give as margin money or down payment. However, you should be ready to fork out extra bucks as interest costs, as the interest rates are considerably higher for personal loans, as against the home loan rates. Typically, home loans are available at interest rate of 7.25%-9.00%, while personal loan rates can go above 20%.

However, availing two loans together might be difficult, if you have opted for maximum loan amount you are eligible for. The HFCs calculates the loan amount eligibility through installment to income ratio (IIR) and this ratio is based are your salary, qualifications, employer/business, years of experience, growth prospects, alternate employment prospects and sources of other income. The IIR is normally restricted to about 40%-50% of your monthly gross income. The 40% IIR is based on these assumptions: about 10% of income is spent on repayment of existing or future loans, about 25% of income goes for statutory deductions and investment purposes and about 25% of income is stipulated for monthly expenses.

Buy home and renovate it too!

While, personal loan is an easier option, home improvement loan can prove to be much more cost-effective for your pockets. The interest rates on home improvement/home renovation/home extension loans are only marginally higher than the home loan rates and vary from 7.5% to 9.5%. Through these loans you can save upto half of interest costs, as compared to the home loans.

An executive with a home finance associate of ICICI Bank says, while bank provides 85% of the property cost as home loan, upto 30% of the loan amount can be disbursed as home improvement loan. Therefore, if one wants to buy a property with cost of Rs 10 lakh, he is eligible for Rs 8.5 lakh home loan and another Rs 2.55 as a home improvement loan. Collectively, he can take a loan of 11.05 lakh, which comes out to be 110.5% of the property cost.

However, renovation loans are sanctioned only after submission of original property papers. Therefore, one has to necessarily opt for the same HFC, from which he is availing the home loan. The HFC keeps the property papers until the home loan payment is on and will not transfer them to another HFC. Still, if one wants to opt for a different bank or HFC for home renovation loan, he has to transfer his existing home loan to another bank after making prepayment charges, as applicable.

Most often when one buys a home that is still under consideration or when the possession is still some time away, full payment is not asked for immediately. Typically, a builder asks for around 15% of the property cost at the time of possession. Therefore, one can easily take a loan of upto 85% of property cost at the time of buying the property and can follow it up with a home renovation loan for the remaining amount before taking the possession.

The only extra effort one needs for a home renovation loan is a certificate from a qualified civil contractor/engineer/architect, detailing the necessary repair or renovation work of the property.

Take a loan and top it up

There may be instances when one has got some liquid funds left in his bank account that can make up for the margin money or the down payment. However, the potential buyer may not be in a position to lock the fund for a long period. In these circumstances, one can utilize the available funds as down payment and take a home loan of upto 85% of the property cost. Subsequently, he can take a top-up loan against his existing home loan and can put the extra money back into his accounts.

With the declining interest rates, banks and HFCs are aggressively marketing their top-up loan products as well these days. The banks are currently offering top-up loans considerably in excess of the outstanding loans plus the prepayment charges, if any. This option also helps in reducing the overall interest costs, as the top-up loans can have interest rates lower than the rate of existing loans, due to the ongoing downward movement in the interest rates. Moreover, in some cases while providing top-up loans, banks consider the current market value of the property as the floor price and with the current boom in real estate market, the property prices are consistently on an upward trail.

Check your good faith

One of the most cost-effective ways to fund the margin money is help from friends/relatives or your employer. While, taking a personal or home improvement loan might cost hard on your pockets, some monetary help from friends/relatives or your employer might come without or very little interest costs. Check out if your employer can provide you with a low-cost loan or if a worthy relative or friend can spare some money for some time. Remember that your good faith counts a lot here and getting help from these fronts depends a lot on how you fare in their books.


A word of caution

To sum it all, while getting 100% funding for your dream home may not be a difficult task, the loan repayment might come to haunt you even after you are sleeping in your own home. Therefore, ascertaining one's repayment capabilities is a must before going for the home loan, whether 100% or 85% of the property cost. Another measure to reduce the burden while going for a smaller loan for the margin money, whether from banks, friends, relatives or your employee, is that one should opt for a step-up home loan. This particular home loan product allows one to pay gradually increasing installments, instead of equal repayment installments under the standard plans. Therefore, while your loan for the down payment portion is still going on, a lesser EMI for the home loan might prove to be really helpful.

Ascertaining one's repayment capabilities becomes more important in view of the RBI (Reserve Bank of India) taking strong note of the practices of providing 100% or more funding for home purchases. In the recent past, the central bank has warned several times against a potential upsurge in credit defaults and possibly a subsequent bubble-bust in the home loan market, as margin money being up by a borrower also works as a sort of commitment from his side to the loan.

Therefore, go and get financed your dream home, but make sure of your repayment capabilities if you want to live happily ever after.

posted by Arhaan @ 12:16 AM