Latest Real Estate News on 'Home Loans'

Credai against linking of home loans to construction stages

Comments Off on Credai against linking of home loans to construction stages   |  September 15, 2013

MUMBAI: Criticising the Reserve Bank’s decision to link disbursal of home loans to stages of construction, real estate apex body Credai said the move will harm developer sentiment and disturb business plans.

RBI today asked banks to link the disbursal of home loans to stages of construction to protect the interests of buyers and contain the fallout of “innovative” housing financing schemes.

It has directed banks that upfront disbursal “should not be made in cases of incomplete/under-construction/ green field housing projects”.

Confederation of Real Estate Developers’ Associations chairman Lalit Kumar Jain said: “Housing finance institutions or banks normally safeguard their interest while devising such instruments. Abruptly issuing such circulars, advising bank against established practices only harm the sentiment and disrupts business plans. This will create setback for projects, affecting the end consumers.”

The notification follows the introduction by some banks of “innovative housing loan schemes” in association with developers or builders, where upfront disbursal of housing loans is made to builders without being linked to the various stages of construction.

Also, under such schemes, the interest/EMI on the housing loan availed of by the individual borrower is serviced by the builder during the construction period. These loan products, the RBI said, are popularly known by names such as 80:20 and 75:25 schemes.

RBI said such home loan products are likely to expose banks and their borrowers to additional risks.

“RBI should have consulted stakeholders before issuing such circulars on disbanding current practices. In the past, the RBI circulars have resulted in reversal of good market sentiments affecting economy and concerning housing sector,” he added.

RBI issues directive to banks: Link home loans to construction status

Comments Off on RBI issues directive to banks: Link home loans to construction status   |  September 14, 2013

Mumbai: The Reserve Bank today asked banks to link the disbursal of home loans to stages of construction to protect the interests of buyers and contain the fallout of “innovative” housing financing schemes. “In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project/houses…,” an RBI notification said. Upfront disbursal “should not be made in cases of incomplete/under-construction/green field housing projects,” it said.

The notification follows the introduction by some banks of “innovative housing loan schemes” in association with developers/builders, where upfront disbursal of housing loans is made to builders without being linked to the various stages of construction.

Also, under such schemes, the interest/EMI on the housing loan availed of by the individual borrower is serviced by the builder during the construction period. These loan products, the RBI said, are popularly known by names such as 80:20 and 75:25 schemes. The RBI said such home loan products are likely to expose banks and their borrowers to additional risks.

The risks include disputes between borrowers and builders; default and delayed payment of interest/EMI by the builder on behalf of the borrower, and non-completion of the project on time.

“Further, any delayed payments by developers/builders on behalf of individual borrowers to banks may lead to lower credit rating/scoring of such borrowers by credit information companies…,” according to the RBI notification. The central bank said that in cases where bank loans are disbursed upfront on behalf of individual borrowers in a lump-sum to developers without any linkage to construction stages, banks run disproportionately higher exposures with concomitant risks of fund diversion.

Banks introducing any kind of product should take into account customer suitability and appropriateness and ensure that borrowers and customers are made fully aware of the risks and liabilities, the RBI said.

With effect from June 21, the RBI revised the loan-to-value (LTV) ratio, which determines how much the banks can finance. For loans of up to Rs 20 lakh, banks can lend up to 90 per cent, while the borrower has to pay 10 per cent. For home loans between Rs 20 lakh and Rs 75 lakh, the LTV ratio is 80:20 while for loans above Rs 75 lakh, it is 75:25. The LTV ratio should not exceed the prescribed ceiling in all fresh cases of sanction.

Factor in capital gains

Comments Off on Factor in capital gains   |  September 5, 2013

Across Mumbai, several families are looking towards the redevelopment of their old tenanted property whereby they get a chance to move into a larger apartment with modern amenities. These properties have been granted higher floor space index (FSI), which is why developers are queueing up amid the lure of high returns.

These dream homes, however, have one grey area: how does one calculate the capital gain in such a case, and the tax thereon? With redevelopment of such properties being touted as a solution for renewing urban spaces, this is an issue that could confront a large number of families across the country.

Capital Gains

“It is calculated when a capital asset — in this case the residential property — is transferred. The transfer includes sale or exchange of property or relinquishing rights to it. If the property is held for less than three years, the gain is short-term and if it is held more than three years then it is long-term,” according to Vinod Sampat, an advocate and property expert.

Let us suppose a buyer bought a flat in in 2001 at Rs 40 lakh. He sold the flat in 2011-12 at Rs 86 lakh. In this case, the capital gain is not Rs 46 lakh (the gain from the transaction), for the buyer has not factored in cost indexation.

Indexed Cost

This concept applies only for computing long-term capital gain. In the above case, the value is Rs 12,29,108 and not Rs 46 lakh (see box), and the capital gains tax is charged at around 20 per cent of this amount. How?

Since the time gap between sale and purchase is over three years, indexation comes into play. The government has declared a year-wise table of Cost of Inflation Index (CII) to adjust original purchase or sale cost as per the inflation presumed in that year of purchase or sale. This CII table is available with professionals such as chartered accountants, valuers, advocates etc.

This index has been computed taking the financial year 1981-1982 as the base year, at which the index has a value of 100. Properties purchased before this year will also have an index value of 100.

Tenanted Property

In the current context, ‘tenanted’ refers to the property taken from the landlord on rent, almost permanently. “This is neither a long lease nor a leave and licence arrangement. There is a lump-sum down payment called Paghadi,” says Sampat.

In Mumbai for example, lakhs of properties in south and central Mumbai are tenanted even to this day. “As per Bombay Rent Act, it was illegal to take or pay Paghadi. However, as per Maharashtra Rent Control Act, 1999, Paghadi has become legal,” says Vimal Punmiya, a tax consultant. Barring a few official Paghadi transactions after 1994, most properties have no proof of this payment.

Taxing Redevelopment

Let us take the example of a family that moved into a 200 sq ft room in 1966 as a tenant on Paghadi basis in the Opera House area of south Mumbai. In 2010, the landlord and the family signed an agreement to redevelop the property. The family agreed to give up the right of tenancy and get a 300 sq ft flat in return — now their own.

Some consultants say that in this case, the fair market value of the room as on April 1, 1981 should be calculated to determine acquisition cost and capital gain.

“The fair market value is calculated as per the Ready Reckoner rate of 1981. For the given location, the maximum is around Rs 1,200 per sq ft. Let us suppose the room is on the first floor without a lift and a view, one can consider the value at Rs 1,000 per sq ft, which makes it Rs 2 lakh. Usually the share of the landlord is 33 per cent and that of the tenant at 67 per cent, or Rs 1.34 lakh,” says Praksah Balu, a property valuer.

So, the indexed cost of acquisition would be Rs 1.34 lakh (fair market value) multiplied by CII of 2010-11 divided by CII of 1981-82. According to the table, the CII of 2010-11 is 711, and of 1981-82 is 100, which makes the cost Rs 9,52,740.

The market value (cost of sale) of the new 300 sq ft flat in 2010 (the year of capital gain) would be at least Rs 72 lakh. The capital gain would be Rs 72 lakh – Rs 9,52,740, i.e. Rs 62,47,260. The capital gains tax, at around 20 per cent of this amount would be Rs 12.5 lakh — a substantial burden on the erstwhile tenant.

Punmiya counters this from a taxation perpective. “If the (Paghadi) transaction (cited here) is prior to 1994, and no money is paid officially, then cost of acquisition will be taken as zero. If there is no cost, there is neither fair market value nor indexation. If the tenant intends to stay in the new house, technically purchased as per Section 54F of the Income Tax Act (related to capital gain), then he is not liable to pay capital gains tax.”

The tenant should get the redeveloped house within three years of giving up possession to avoid crossing the three-year time frame of Section 54F. “He will not be able to transfer the new flat for the next three years for exemption under long-term capital gain. Any sale/transfer in future will attract capital gains tax,” says Punmiya.

He adds that official Paghadi transactions after 1994 will be subject to capital gains tax, allowing for fair market value and cost indexation (like that calculated above).

Punmiya advises tenants to have all documents such as agreements, purchase deed, completion certificate etc to justify exemption to the tax authorities. In case of substitution of fair market value, the valuer’s report must be obtained, preferably before demolition.

Banks to ‘name and shame’ guarantors too

Comments Off on Banks to ‘name and shame’ guarantors too   |  August 3, 2013

Saturday, July 20, 2013

Tightening the noose on loan defaulters, banks have decided to ‘name and shame’ the guarantors of such borrowers as well by publishing their photographs and other details in newspapers and on notice boards of bank branches and community centres.

Banks, mostly public sector lenders, began publishing pictures of wilful loan defaulters in newspapers and at other places around the areas of residence of such borrowers earlier this year to make them to pay up.

This exercise has now been extended to the guarantors of loan defaulters as well as part of the efforts to build pressure on the borrowers to clear their dues

Interestingly, public sector banks have taken a lead in adopting these measures and are already making public the photographs and other details of loan defaulters.

According to bankers, the photographs, names and addresses of the borrowers and guarantors would be published in newspapers if the dues are not cleared within 15 days of the notice containing particulars of the original borrowers.

Courts’ view

Recent High Court judgments have also strengthened the banks’ hands on naming and shaming of guarantors to recover their dues. Several high courts, including the Madras High Court, have held that banks can publish photographs of guarantors in newspaper advertisements, say legal experts.

With large banks adopting the strategy of publishing photographs to put pressure on defaulters, even mid-size and small banks are now looking to follow suit, said sources in the banking industry.

The RBI has authorised banks to go after both borrowers and guarantors of loans. In the eyes of law, both are to be treated on an equal footing.

RBI flags high home prices

Comments Off on RBI flags high home prices   |  July 9, 2013

The Reserve Bank of India (RBI) in its Financial Stability Report for June, released on Friday, has flagged the rising house prices in most metros. This is at variance with bank credit to housing, which has actually fallen. “Growth of bank credit to this sector has, however, been moderate. Further, the share of credit to the housing sector fell to 9.5 per cent as at end March 2013 from 13.3 per cent at end April 2007,” the RBI said.

In parts of Mumbai, for example, the central bank says that there are indications that the price to annual rent ratios are as high as 50. “There is a need to closely monitor this sector,” the central bank said.

Last week, the head of a housing finance company too touched upon the high home prices in his message to shareholders. In HDFC’s 36th Annual Report, chairman Deepak Parekh observed, “Even in tier II and tier III cities, home prices are inflated.”

The NHB Residex, an index that monitors house prices in key cities has in its latest instalment pointed to this trend.

For the quarter ended March 31, house prices in 12 cities have shown an increase over the previous quarter. The Residex monitors 20 cities. The maximum increase was observed in Jaipur (28.74 per cent) followed by Bhubaneswar (14.54 per cent), followed by Pune (7.81 per cent) and Bhopal (6.49 per cent). Other cities too witnessed a marginal rise, such as Patna (0.67 per cent), Ahmedabad (0.53 per cent) and Indore (0.52 per cent).

Parekh has advocated increasing supply as the only way to reduce prices and called upon developers to cut prices. “Ultimately, developers need to recognise that in the long-run, it is to their advantage to allow a correction in prices,” Parekh said.

This view has been countered by the real estate industry. “In my opinion, there is enough supply in the market in all segments. Increase in supply is not the solution to the problem. In fact, high supply will worsen the situation further,” said Navin Raheja, president, National Real Estate Development Council (Naredco).

“Reducing prices could significantly impact sentiments in the market place. It might create panic situation in the market,” said Nishant Singhal, director-strategy, Investors Clinic Infratech, a property brokerage.

Instead developers have been attracting buyers by offering payment schemes such as 20:80 schemes and interest subvention schemes. Parekh cautions against such “teaser” offers. “To my mind, teaser products of any nature entail risks. Customers need to be cautious of ‘too-good-to-be-true’ type of products. Borrowers must not be blinkered into believing that there are no risks when developers offer to pay interest on a borrower’s loan for a specified period.”

In fact, such schemes are also on the radar of the National Housing Bank (NHB), the regulator for housing finance companies. “We are keeping a close watch on such schemes. We aim to ensure that developers do not derive undue regulatory arbitrage if lenders unknowingly or unwittingly club individual retail loans to the project loan,” said RV Verma, chairman and managing director, NHB.

Raheja pegs the increased prices on the very nature of the business with high capital costs, which escalate as approvals from various authorities take up significant period of time. Anuj Puri, chairman and country head, Jones Lang LaSalle India agrees with this view.

“The ground realities of the development business also need to be factored in. The general impression is that the high prices being quoted by builders stem purely from a profit motive. However, it is not commonly understood that builders have also been paying a lot more for developing their projects. To begin with, obtaining the 57-odd permissions for construction of a project can take as much as two years,” said Puri.

A major cost is the purchase of land, which can work out to a substantial portion of the total project cost in metro areas. Currently, developers have to resort to private financing to cover the purchase of land. The RBI has given a ‘high risk’ weight to land purchase and banks do not offer financing. The move is essentially aimed at preventing asset bubbles, which were the prime reason for the 2008 financial crisis.

Verma, however, calls for a relook into the business model that is prevalent today in the real estate sector. “Developers resort to costly financing to purchase land. It is time to take a relook at land purchase. Bringing in a special regulatory treatment for residential projects would be most favourable. If there is a mechanism for part financing of land, the lender can monitor the project from day one, which can help mitigate risk and bring in better affordability.”

The high land costs have become a major impediment to the growth of affordable housing, the sunrise sector, as Parekh observed.

“In most states, the floor area ratio (FAR), density and ground coverage norms do not support creation of affordable housing. The long approval process is another major problem. In the cities where land cost is high, this is possible only under public-private partnership. Upward revision in FAR, ground coverage and population density norms are required on priority basis,” said Raheja.

While industry players pin the rising prices on extraneous factors, the RBI has plans to monitor the sector closely by developing a set of indicators. “Indicators such as house price to household disposable income ratio, household financial obligations to household disposable income ratio, land price indices, index of construction costs, and price to rent ratio, information on ownership of houses, among other indicators need to be developed,” the RBI said.

How to handle home loan defaults

Comments Off on How to handle home loan defaults   |  May 5, 2013

Santosh had been quite regular with home loan EMI payments for the last three years. However, paying for his father’s sudden medical requirements drained off his balance leading to a couple of EMIs being defaulted upon. Once his initial worries about his father’s health were over, Santosh asked the bank what his options were with regard to his skipped EMI payment. He was relieved to receive an extension.

If you have missed your EMI for any reason then do not panic as it is not the end, you still have an option, even if it costs you a little more. Of course, the real challenge will be to adjust your funds.

Options for Loan Adjustment

If you have a good track record, then the bank will be willing to make some adjustments to help you manage your default payment easily by either extending your loan term or reducing your EMI. There are numerous solutions available:

* Reschedule your loan term: If after analysing your situation, the bank feels that your EMI amount is high, they might consider rescheduling your loan tenure by extending it. Your monthly EMI commitment would be reduced, which of course means more interest paid. However, it also means some immediate relief and you can always renegotiate with the bank to raise your EMI when your financial position is better. This is more feasible than paying the pre-payment penalty at the end of the loan tenure.

* Deferring payment: You may ask the bank to defer your EMI for a certain amount of time if you are expecting some rise in the cash flow from a job change or maturity of some funds. The bank may permit this, but it will charge you a penalty if you do not make the payment within the stipulated time period.

* Restructuring the loan: Banks have the provision for restructuring housing loans by extending the loan tenure under genuine default circumstances under RBI’s policy guidelines.

Sourcing Funds

Even before you go to the bank for negotiations, it would be better to reconsider your sources of funds so that you can discuss your options accordingly. Once you have agreed upon the alternatives with the bank, start working out your cash flow to meet the EMI requirements. If you will be making a one-time payment for settlement, then the adjustment of funds must be made accordingly.

Repossession & Auction

If you are unable to cope with your EMIs and there is no other alternative left, the loan will be classified as a Non performing Asset (NPA) by the bank as per the RBI guidelines and a notice will be sent to you under Section 13(2) of the SARFAESI Act.

The guidelines state that:

The customer will be allowed 60 days to regularise the account or to settle the account post-issuance of the notice.

* On the refusal of the borrower to pay, then the authorised officer can hand over the demand possession notice and ask for physical possession of the property.

* The bank can proceed to auction the property 30 days after taking possession of the property if the customer does not come forward to repay the loan. The bank shall send a letter to the customer informing them about the auction date and time.

* The bank will consider handing over the property back to the customer after possession at any time before concluding the sale transaction of the property if they clear all bank dues.

* Any proceeds over and above the bank dues from the auction will be returned to the borrower.

A Word of Caution

The SARFAESI Act gives the customer the right to appeal against repossession taken by the bank under the Debt Recovery Tribunal within 45 days from the date the action is taken.

Loan default can result in seizure and auction of your assets, affecting your credit history. Even late payment, rescheduling your loan can affect your chances of obtaining a loan in the future. So, it is better to plan for such eventualities when you take the loan in the first place. However, if you are a victim of unforeseeable circumstances, the best you can do is to have a backup plan.

To invest or prepay? A crucial decision

Comments Off on To invest or prepay? A crucial decision   |  April 29, 2013

Ramesh has just received his annual bonus of Rs 3 lakh. He has a home loan for Rs 35 lakh with a private bank, and pays interest at 11 per cent per annum. The equated monthly instalment (EMI) paid by Ramesh is Rs. 34,500. He wishes to reduce this huge burden progressively.

The long tenure of a home loan results in a substantial interest outflow, in addition to the huge principal repayment. In most cases, the total interest repaid is more than the original loan amount. A considerable portion of the EMI goes towards the interest component, and only a minuscule portion is allocated towards principal. As in the case of several borrowers, Ramesh also faced this problem. How can he reduce this burden?

Ramesh has two choices: Either increase the EMI amount to reduce loan tenure, and the interest outflow, or part-prepay the loan with the bonus he received. Ramesh found the latter option more feasible. But he had another dilemma of whether to repay the loan or to invest this amount in good investments. Let us look at both the cases:

When to Prepay?

A major portion of the EMI is allocated towards interest, especially during the initial 5-8 years of your loan. This is the best time to part-prepay the loan. When you prepay, the full amount goes towards reducing the principal. This in turn reduces the total loan period and total interest outflow.

If you are placed in a situation, which does not assure a regular income, you should prepay your loan whenever you receive any windfalls.

Another factor to be taken into account is the interest rate scenario in the economy. If there is an expectation that interest rates may harden, you should prepay as an increase in rates will result in an increase the interest burden on your floating rate home loan as well. In this scenario, you may end up paying a higher EMI, or there will be an increase in the loan tenure. Remember, it is always better to reduce the tenure and pay off the entire loan before retirement.

The most common deliberation is whether to use the cash to reduce the home loan amount or to invest this amount. You can prepay when the interest rate on your home loan is higher than the post-tax interest rate you earn from your investments. Do remember that interest rate cycles move up and down and so returns from equity-related instruments can be volatile.

When not to Prepay?

Compare the returns from your investment and the interest on your home loan. Invest the lump sum cash received if the post-tax return from your investment works out to be higher than the home loan rate. You must also consider the tax benefits of a home loan for both principal and interest components. So when the rates are compared, the reduction in tax outflow due to these deductions must be factored. Investing in fruitful investment avenues makes sense if you are below 35, as you can repay the loan before retirement.

The third option

Yet another option is to port your home loan to another bank, which charges a lower interest rate. As RBI has waived prepayment charges on floating rate home loans, even if you do a balance transfer to another bank, you can now easily shift banks without incurring high costs. While the interest rate is the most important factor to be considered when you shift banks for home loans, remember to consider a few other things. An important expense you will incur is the processing fee charged by the new bank. In addition to this, you may also have to incur expenses on stamp duty and related charges and insurance premium (some banks require you to compulsorily take a fire insurance for your house).

Your existing lender may offer you a lower interest rate if you pay conversion fee, which is more or less equal to the processing fee in the new bank. If this reduced interest rate is the same as the new lender’s rate, it is better to stay with the existing lender.

Your decision to part-pay the loan or not depends on several factors. Remember you must always try to maximise your earnings, either by reducing your interest outflow or by maximising your investment returns.

— The author is CEO,–a-crucial-decision/1105045/0

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