Advisory

Saving to buy a home

Not all expenses of buying a home are covered in the home loan. You need to save the out-of-pocket expenses before you decide to venture into this expensive yet beautiful project. A responsible ownership plan can help you raise the money and move in the right direction.

By Sangeeta Sinha

BUYING a home is an exciting milestone but poses many challenges, the most crucial being saving enough for the down payment. If you decide on a house then five to seven per cent for stamp duty and registration charges plus some miscellaneous charges will be needed.

All these extras may add up to around
INR 1.5 million. It will be a big amount to pay from your pocket. How to raise this fund?

BE REALISTIC

Check your affordability and make a responsible plan for this expensive purchase. Follow the simple rule; if you can’t afford don’t buy. Set a realistic amount based on your financial situation and other responsibilities, like saving for retirement or a child’s education.

Getting a big loan may not be difficult but stick to your original plan. The excitement of a big house may not last long when your EMI takes away most of your income. How much you can afford could depend on several factors like your income, expenses, going interest rate for mortgages, down payment etc.

SAVING FOR DOWN PAYMENT

Once you have reached a realistic price range, the next move would be to plan the down payment target. Down payment is the amount of money you pay out of your pocket, right at the start, towards the purchase of the house. For most buyers the first challenge is to save enough for a down payment.

Typically, banks insist on a minimum margin of 15 per cent; therefore, you should save enough to meet this requirement, says a senior official from a leading bank. For example, if you think the home may cost INR 5 million then you must have `750,000 as down payment.

Now what if you don’t have enough for down payment? Are there loan schemes for 10, five or zero per cent down payments? Such options are usually not available with banks, says a loan expert from banking services. Some Non Banking Finance Companies may offer this but the rate of interest will be much higher. Since we are looking at a 20 to 30 year repayment even a two per cent difference in interest will be substantial, he adds.

It is not prudent to go for lower down payment option on account of the higher cost of borrowing, advises the expert. People buying a house with the aim of selling it for a profit may find this attractive as the appreciation may be greater than the cost of borrowing.

HOW TO SAVE

So it is a good idea to plan well and save at least for the down payment. Your saving techniques should depend on how much time you have. If it is two to three years, perhaps a recurring deposit where you put in a fixed amount is suitable. If the house is to be bought five to 10 years later then a mutual fund SIP may be better as the returns may be higher.

Banks also offer personal loans with a repayment of three to four years. This can be a good option for meeting any shortfall in margin money/down payment, advices the official. Since property prices are going up all the time instead of waiting to accumulate enough for down payment one can take a personal loan.

However, opting for personal loans can be an expensive affair, as interest rates are very high. It is always a good idea to pay the down payment from your own money, savings or by liquidating some assets.

MORTGAGE OPTIONS

When it comes to your mortgage different loan types and payment options that are available can baffle you. You can go for five, 15, 20 or 25-year options. Some banks even offer 30-year options As there is a limited rebate on interest paid on home loans, typically the 20-year option appears to be the best one according to an expert.

You can choose your option based on your repayment capacity. Lower tenure will mean lesser interest payment but a high EMI. Tax rebate will also be available for a lesser period.

BE FINANCIALLY PREPARED

Owning a house involves lot of other costs and not just the monthly mortgage payment. You should have enough funds for taxes, insurance, maintenance and even emergency repair fund. Don’t forget the stamp duty and registration fees.

Be sure of your job security and your ability to get a new job quickly in the event of a layoff; in case of any doubt don’t get into such a big liability.

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Nowadays builders also offer many options to make your financing easy. Check with your builder if he has any scheme for stage payment. There is also a trend where the builder asks you to pay 20 per cent initially and 80 per cent after possession. In some cases even the EMI (interest part) is taken care of till you take possession. There is also a trend where builders have tie-up with banks where they have schemes like paying some amount at the booking time and rest after completion. Some also offer a holiday scheme where EMI starts after a year after you take possession. So do your home-work well, research and then plunge.

TIPS

1. Aim for a home you can really afford
2. Ideally you should save and invest towards the goal when it is three to four years away
3. If you have not done that you could look into your fixed deposits or other short term investments
4. You could even borrow against these instruments, if it is difficult to liquidate them
5. Tap into your long-term investments as the last resort
6. Avoid personal loans and credit cards; they carry exorbitant interest rate
7. Explore the option of borrowing against mutual funds, fixed deposits, insurance policies or even jewellery
8. Partial withdrawal can also be considered from your provident fund

Looking Forward to Real Estate Investment Trusts

With SEBI clearing the way for property-backed investment vehicles in 2014, real estate investments are coming within reach of the average citizen.

Real estate, the king of all assets today, requires large investments. In the current pre-ReIT days, people with funds as small as `2 lakh, cannot think of investing in real estate. Nor do individual investors have the wherewithal to perform due diligence for large projects. and when it comes to commercial real estate, they don’t have the means to manage it either.

Enter Real Estate Investment Trusts (REIT)

By offering shares to the public, ReITs bring lucrative investments in commercial real estate within the reach of the common public. across the world, ReITs have been around for a while now. First created in 1960 in the USa to make large-scale, incomeproducing real estate accessible to regular investors, they have since been established in more than 20 countries.

What are REITs?

Just as mutual funds invest small and large investors’ money in equity and debt, ReITs invest funds in incomegenerating real estate assets. The ReIT could own or finance malls, healthcare facilities, shopping centers, apartments, office buildings, hotels and similar income-generating properties.

Units similar to shares are issued to investors, which are listed on the stock exchange. expected to be launched after Budget 2015, ReITs in India must be listed on the stock exchange and publicly traded.

as per SeBI rules, commercial properties worth a minimum of `500 crore can be pooled and gather investment. at least 80% of the properties must be completed and generate income. ReITs must get registered and then raise funds through an IPO which should not be below `250 crore.

Hybrid REITs

World-over, equity ReITs own income-producing properties and engage in leasing, maintenance and development of the property, whereas mortgage ReITs don’t themselves own the property. They lend money to real estate owners and operators or extend credit indirectly in the form of loan acquisition or mortgagebacked securities.

Hybrid ReITs, which SeBI has introduced, are a combination of equity and mortgage ReITs. as per SeBI norms, ReITs must invest in at least 80% performing assets and a maximum of 20% in under-construction assets, shares, debts or real estate companies and mortgage-backed securities. Yet another rider is that ReITs must invest in at least two projects with the maximum investment in a single project not crossing 60% of the value of assets.

Effect On The Real Estate Industry

Developers stand to benefit since ReITs can free their capital, reducing their debt burden. “ReIT listing would lead to compression in the cap rate, which should lead to better valuation for commercial properties in addition to freeing up of the capital for the developer,” according to an ICICI Direct report.

On the risk side, fresh investments can drive real estate prices upwards. Further, ReITs will be under constant pressure for payouts, leading to rise in rentals. There could be owners who off-load poor-performance properties, hurting individual investors as well as this new investment vehicle.

Still, ReITs are expected to add to the current buoyancy after the sluggish economy and slow real estate movement of the past few years. For investors, it pays to understand the funds before they invest.

Tips to Invest in REITs

• Invest in REITs launched by companies with strong management and good track record
• Limit your REIT investment to 5-10% of your portfolio
• Avoid those that use borrowed capital
• Read the prospectus before you invest
• Understand the nature of the properties in which the REIT has invested