My father bought his first property in 1999 as ready to move in house for our staying. This was a house constructed on 350 sq yards of plot in posh locality of one of the districts in Haryana. It was his long awaited dream come true – to own his own house and I still remember how he struggled to get the home loan sanctioned for the same. He owned his own house at an age of 53 years.
He had a bank account in Bank of Rajasthan (this has been now taken over by ICICI) for last 15 years and he applied for his home loan in from the same bank. The interest rate at that time was close to 16% at that time there was no concept of floating rate if interest. It was a very painful process and it took him close to 1 month time to get all the documentation on place.
It was a bank driven home loan market rather than the customer driven market and it was a very cumbersome process to get the loan disbursed. They also charged a hefty processing fees and this is when my father was a lecturer in one of the reputed colleges of the town. They only funded close to 40 % of the property value. This could have been because of the age of my father at that time. Finally, he got his loan sanctioned and disbursed and the papers of the property were handed over to the bank.
Although he took a loan but the same was not very well seen by the society in those days. His friends in every now and then in discussions will keep telling him that ‘ Karz ki jindagi main Kya rakha hai’. Are you not living or earning for Bank were the other common comments made by his friends. But that’s fine and he owned his house.
There has been a paradigm shift in the housing loan industry since then. It is a more matured market with lot of players in the market. The floating rate interest regime has totally revolutionized the market and it has become more of a customer driven market. The rates are hovering around anywhere between 10% to 11.5 % for the salaried employees and few basis points higher for businessmen and self employed.
Few decades back, buying a home was not a very easy task as there were hardly any lenders available to loan the ever increasing astronomical lump sum of money. However, with time, the rising property prices and the burgeoning housing finance market in the country, made the phenomenon of the home loans easy and the dream of buying a home possible. Also, the HFC’s (Housing Finance Companies) and banks have come up with so many home loan plans that they have become an answer to every customer’s necessity. Apart from this, the changing equation of market has also provided customers with several reasons to opt for a home loan.
The purpose of this article is to highlight some of the potential of home loans and why the people who are eligible for home loans and have the capacity to pay the EMI should take the home loan and buy the property.
The IT revolution in country gave the opportunity to lot of individuals to work in multinational companies in India with decent pay packages and in some cases I would say hefty pay packages at a very young age. The pay packages make them eligible for home loans at very attractive rate of interests.
I have seen two set of people in last 10 years of my working –
· One who have understood the potential and beauty of the home loan and have made huge returns in the property boom witnessed across India. These people went ahead and bought properties on leveraged money and made great returns. The money was borrowed from banks is at around 10% and the growth in the last 10 years in some specific areas have been more than 10 times.
27 Is the average age of new home buyers in India
down from 41 a decade ago..!
· The other ones are more risk averse people who have always thought that prices of property in India are not justified and they will correct. They had the same thought 10 years back and have the same thought even today. The money they earn is lying idle in fixed deposits (I say this money as idle because it is not even covering the inflation). I have tried investing in stock market directly and through mutual funds but have in most case either made a meager return or have typically lost money. They said try investing in mutual funds through SIP but that didn’t work even, might be my timing was wrong as the entire industry can’t be wrong. In stock market bank doesn’t fund for your stocks but in buying a house the same is funded by banks.
The question is – Are the kind of returns made by first set of people in real estate possible now? The answer is plain and big NO. But there still a possibility of decent returns and I would recommend that if one staying in a rented accommodation should definitely go ahead and buy the property by taking home loan. According to industry estimates, the long term average return in investing in a home is about 20% p.a. while the average cost of borrowing funds in the market today is about 10% p.a. (considering all tax breaks).There is no point sitting on the fence and waiting for the property prices to further correct. When you are buying the property for your own living, short term fluctuations do not affect you in the long run.
Depending upon one’s loan eligibility the banks are ready to fund 80% of the property value. This means that you need to pay only 20% from your own sources. Isn’t this phenomenal! One can be an owner of the property by paying only 20% of the property value.
Lot of people has asked me is this not risky borrowing such a hefty amount of money? Even my wife asks me same – I just tell them one answer that I am not borrowing money to gamble or bet on the horse race. I am borrowing money to buy a really ‘Real Asset’. It is not a piece of paper or a virtual asset. It is a real asset and we can touch and feel the same. Believe me once you enter your own property it is out of the world feeling.
The other key question is that property transactions require lot of black money (cash). This is true but over the years this has changed. In today’s market there is lot of properties available in total white money. Also in some cases out of the 20% money to be contributed by you there is a possibility that you might have to pay some portion in cash. Some of the banks fund 80% of the market value.
The other common question is what if I lose my job. As I stated these are all negative feelings and just to deter one from taking life time decisions. Just look around you and try finding out how many examples you have where people have lost their jobs and have not been able to pay their home loans. There would be cases but very few.
I can tell you one thing that people survived the worst economic crisis of 2008 and in worst case if you are struck there would be some angel waiting to bail you out. These are just the exceptions and one should not be too overly bothered about them.
As banks are funding majority of the property price bank will do a thorough due diligence of the property covering the legal and technical aspects of the same. This is a great benefit of buying the property with bank loans as one can be at ease regarding the title of the property.
For salaried employees, housing loans are the best way to avail tax benefits. Many people simply go for the home loans in order to avail these benefits. Interest payments up to Rs 2 lakh on housing loans are deductible from the taxable income and also principal can be claimed up to the maximum of Rs. 150,000 under Section 80C. This is subject to the maximum level of Rs 150,000 across all 80C investments.
Don’t over leverage but do leverage. There is no better way of making money then by exploiting your eligibility of home loan.Home Loan tenure is dependent on your age. So earlier the home loan taken the better it is. One should also take personal home loan insurance to mitigate some unforeseen event happens. In this case the survivors will not have to pay the balance EMI,s and the loan would be closed by the insurance company.
If you have the eligibility for home loan and have the capability to pay the EMI’s please go ahead and buy a property. The home loan also instills a financial discipline in you and you tend to be a more judicious spender. I am not in any way trying to preach you to lead a compromised life style but definitely once you take a loan and you have the EMI’s to pay , you are be bound to be financially disciplined.
At last I would like to conclude that please go ahead, utilize your home loan eligibility and buy a decent house. You will never repent your decision. !!!!