Why real estate investment beats the stock market

The stock market has always played the role of a barometer to the economic mood of a nation. Real estate is one of the prime elements in the latter context. In fact, an interesting and important relationship exists between real estate investments and the stock index. While both offer a profitable investment opportunity, both also carry risks that complement each other.

A common belief has been that the profit margins associated with stock investment has been higher when compared to alternative asset investments. Stocks are liquid and flexible, whereas real estate is not. Also, stocks offer growth rates that real estate investment can rarely match. Lastly, stocks are also easier to acquire and operate than buying a property as investment. Investment property also includes several added elements like insurance, maintenance, taxes, legal fees, broker commissions, etc.

It has also been observed that dramatic movements in the global stock market will throw up salient differences between real estate and equity investment. The strength and weakness of the global economy appears to influence both real estate and stock prices. According to the CXO Financial Advisory Group based in U.S., real estate and stocks are negatively correlated. After the great recession, the stock market lost about 60% of its value. With loans getting cheaper, people now invested more in real estate, since it promises guaranteed returns in the future.

A crucial point to note here is that while stock prices can rise and fall, real estate investment almost always brings in more profits. In fact, the allocation towards real estate in most investors’ portfolios has steadily risen since the Global Financial Crisis. This is because investors seek to take advantage of the low correlation between the asset class and equity market.

We already know that volatility is always caused by the monetary and fiscal policies of governments, and this has effectively increased the focus on real estate investments. Rising inflation has the same kind of effect on both investments. Increased inflation lowers the currency value, and in turn drives up the price of assets – real estate very prominent among the asset classes.

The outcome of stock market volatility is more evident if one follows the changes in real estate markets. Real estate investment provides more stability and can also deliver a continuous income stream, and this is why it attracts more investors. The slow but steady correlation between the stock markets and real estate markets provides the important advantage of diversification in an investor’s portfolio.

Also, investors can be more confident of constant returns, since the real estate market is relatively immune from both short and long-term price swings. Stocks, on the other hand, are subject to constantly changing prices, and investors can be placed in really tough situations when choosing whether to hold or sell their stocks.

To conclude, both assets offer long-term appreciation of value. However, if one is looking to create a strong portfolio and has the right kind of funds to invest, real estate will always be a safer and less stressful platform. After all, the demand for homes will never cease as long as we continue populating the planet – what can be a better source of assurance for an investor?

 Source – DNA India

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NRIs Showing Renewed Interest in Indian Real Estate

Stability in housing prices and favourable rupee movements are bringing back the NRIs in a big way to the real estate market, mortgage giant HDFC has said.

To tap their interest, HDFC and also a number of property developers are undertaking special marketing campaigns including organising property fairs in places with high NRI population such as the US and the UK.

Interestingly, the non-resident Indians living abroad are showing a renewed interest in the Indian housing market at a time when the local demand is relatively sluggish.

“We are seeing a lot of interest from the NRI community. The rupee depreciation against the US dollar is also helping, for the prospective home buyers from the American continent,” HDFC Ltd managing director Renu Sud Karnad told PTI.

HDFC, the country’s largest mortgage lender, has planned ‘India Homes Fair’ exhibition in London on May 30-31, which will have more than 100 projects on display from across India.

Ms Karnad said that housing prices have stabilised, while softening of interest rates have helped make the home purchase much more affordable.

Property consultancy major CBRE’s South Asia Head (Residential Services) A S Sivaramakrishnan said that NRIs have become extremely important for the Indian real estate market and they contribute 8-10 per cent of the total housing sales volume across India.

Stating that the contribution of NRIs in housing sales varies from city to city, he said the NRIs account for 30-35 per cent of apartments sales in Kerala.

Their contribution in Hyderabad and Delhi-NCR markets are 10-12 per cent, Mr Sivaramakrishnan added. Cushman & Wakefield’ executive director (residential services) Shveta Jain also said that investments in the real estate sector by NRIs have gained momentum over time with prices being stable or reaching bottom in select cities and markets, rupee devaluations and attractive long term returns.

“With city limits expanding to peripheries, investors have a variety of products ranging from affordable to luxury developments and special housing projects like senior homes to choose from.

“Given the tepid demand from resident buyers and investors, developers have also undertaken special marketing efforts to target NRIs, whose investor confidence in Indian real estate market will get a further boost with the introduction of the Real Estate (Regulation and Development) Bill,” Ms Jain added.

Ms Karnad said that the projects on display during its London fair are from Bengaluru, Chennai, Gujarat, Goa, Hyderabad, Kerala, Mumbai, NCR, Pune, Punjab and Kolkata, among others.

The options include flats, villas and plots and customers would be given exclusive offers and value-added benefits.

HDFC would be holding such exhibitions for the eighth year in a row at a foreign location, showing its popularity amongst the NRI and PIO (Person of Indian Origin) community in London and other cities abroad. (PTI)

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Can the Online Real Estate Shopping Sell 863 Million Sq. ft. of Unsold Real Estate Assets?

The Real Estate Industry in India is considered to be one of the fastest growing markets. It is expected to touch $180 billion by 2020 with a CAGR of 11.2%. However with 863.09 million square feet or 650,000 unsold assets, as per Liases Foras, the real estate industry in India is extending itself to attract customers from the internet. Google says $43 billion of real estate is sold due to research and decision making on the Internet.

Just like the Online Ecommerce portals, the real estate industry too has got into the so-called The Online Real Estate shopping way. Top Real Estate Portals like Magic Bricks, CommonFloor, 99acres, IndiaProperty and Housing offer opportunities to both buyers as well as real estate firms to engage online.

Opportunities for Real Estate firms & Buyers

Real estate firms utilize these online portals to be listed and showcase their projects to the world. With features to display even the minute details of the projects along with Virtual Walkthroughs and Video listings, it becomes easy to gain a buyers attention. Also with options to place inquiries and book, many firms have taken great advantage of it. In March this year, Tata housing says till date they have sold over 1500 apartments online equalling to about 1 million square feet and Pune-based Kolte-Patil developers recently sold over 200 houses through the online medium.

For buyers there are enormous opportunities taking the online route. They could choose to buy properties in a city where they do not reside. Buyers can do price & feature comparisons between projects. The online medium also offers them a lot of information to research about the projects and the company before they wish to do a site visit.

Threats of Online Real Estate Shopping

Where there are opportunities, the online real estate poses quite a number of threats to both buyers as well as the real estate firms.

Since it is the Virtual Reality, a buyer cannot verify the existence of the project in the state that has been said in the internet.

“A buyer should always visit the spot and check out the social fabric before buying. For all you know, these projects might be in no man’s land” says Pankaj Kapoor, MD of Liases Foras.

Also, builders often use the internet route to offload inventory as a last option. Hence, it is advisable to use the internet only as a research option and as a supplement to the standard evaluation of projects.

Subhankar Mitra, Head, Strategic Consulting (West) at JLL India says, “At best, it can be used for information dissemination, due diligence and price comparison. Unlike retail products, here it is better to research online and buy offline”.

The threats to the Real estate firms are much stronger than that of a buyer. For a buyer there are options to choose one against the other, but for a real estate firm, the online offers are a bigger threat in terms of reputation damage of their businesses. Disgruntled buyers sling mud at the real estate companies on popular social media pages such as Facebook, Twitter, Google+ such that the companies are defamed. Online has become the ideal platform for an irate buyer to tell the world about their experiences. The brand gets damaged in the course of action. Builders have to work a lot on their reputation to neutralize them.

“When we see negative conversations, we try build on them and put the right perspective forward, reason it out. If there has been a project delay, we tell them the ground reality about why it happened”, says Rajeeb Kumar Dash, head of marketing services at Tata Housing.

Conclusion

For a buyer, Online Real Estate should be a medium to research and evaluate the projects, builders, and the opportunities. It should not be the only way to purchase real estate. Real Estate is not Retail.

For a Real Estate firm, the mantra Ensure your Brand Reputation is held high in the Internet world. You should keep track of what your brand encounters and manage where necessary. But the first step to it is to get your online reputation assessed.

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India’s top 50 real estate investment destinations of 2015

Makaan.com, conducted a research to identify top areas for property investment in 2015. The research was conducted to help the investor community identify & shortlist areas that hold the promise of good returns based on their past performance. The analysis was conducted basis data compiled in March 2015 and tracked the residential property price movement over the past one year and came up with a list of 50 localities / areas with maximum price appreciation (please see the table below). The research also gave property recommendation for people falling under different income brackets.

There are 14, 11, 9 and 7 localities / areas from Mumbai, Delhi NCR, Pune and Bangalore respectively making them the most favored among the investor’s community. Chennai and Ahmedabad are represented by 3 areas each whereas Kolkata and Hyderabad got represented in the list with 2 and 1 area(s) respectively. We hope you benefit from this analysis.

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City wise analysis of Top 50 areas for property investment in India

Mumbai: Mumbai seems to be the most favorable investment destination as 14 areas feature among the top 50 list. Chembur East in Mumbai Central Line, Vile Parle (East) & Bandra (East) in Mumbai South-West and Goregaon (East) in Mumbai Andheri-Dahisar have posted over 20% price appreciation. Mumbai has seen stabilization in property prices on account of un-sold inventory and delay in new project approvals. Areas in Thane and Navi Mumbai are finding favor among the investors who want to invest in sub 10,000 psf properties with the promise of high returns

New Delhi: A total of 11 areas from Delhi NCR feature in the research. It seems the city has been able to hold on to the momentum inspite of the overall fall in property transaction in the past year. Most of the high growth areas are in the NCR region of Noida, Greater Noida, Ghaziabad and Gurgaon. Prominent areas in the top 50 list include Techzone – 4, Pari Chowk, Noida Expressway in Greater Noida; Sector-46, Sector-120, Sector-110 in Noida; Sector 54 and Sector 73 in Gurgaon. All these have appreciated by between the range of 45% to 21% in the past one year essentially because of infrastructure development, connectivity and lower base price. Rohini in North Delhi is the only locality that is in main city of Delhi and has featured in the top 50 investment list, the area has given 11% price appreciation. Areas in Delhi NCR that have given the best returns to the investors are Sector 46 Noida, Sector 54 and 73 in Gurgoan. Property prices in these areas have appreciated in the range of 35-45%.

Pune: The top areas that have appreciated the most in Pune are Ambegaon, Bibewadi, Chinchwad. These areas have shown an appreciation ranging from 22-26% over a period of one year. Pune has seen a continuous influx of IT companies and the city is emerging as a viable option for investors from Mumbai. This trend is likely to continue for the next few years.

Bangalore: Bangalore has 7 area which are featured in top 50 investment list of which RMV in Bangalore North, Rajarajeshwari Nagar from Bangalore West, HAL Layout from Bangalore East, are the 3 areas in Bangalore that have given the best price appreciation. Property prices here have appreciated by between 7-21% in past one year. The ongoing metro corridor is casting a positive rub off on some of the nearby areas which might have caused favorable sentiments.

Ahmedabad: Prahlad Nagar and Satellite Road from Ahmedabad West and Gandhi Nagar from Ahmedabad Central are the 3 areas in Ahmedabad that feature among the top 50 list. The city’s localities have shown an increase in prices in the 11-16% range

Chennai: Porur in Chennai West and Pallavaram, and Thoraipakkam in Chennai South are also featured among the top 50 list. Property prices in these region have appreciated between 11-28%. The top investment locality of Chennai is Thoraipakkam which has shown 28% appreciation.

Others: Kondapur from Hyderabad, Garia and Tollygunge localities from Kolkata are other areas that have made it to the top 50 most investor friendly areas in India. These areas have given an appreciation between 8-11%

Commenting on the research, Aditya Verma CEO of Makaan.com said “Over the past 12 months property prices in India have moved in a narrow range with a slight negative bias. Just like one can identify good stocks in a depressed stock market, one can identify good investment areas in the current property market. Overall property prices in India are likely to remain stable over the next 12 months. Investors can take advantage of this situation and strike a good bargain”

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DLF to sell properties worth Rs 15,000 crore in various projects

India’s largest realty firm DLF plans to monetise properties worth about Rs 15,000 crore under various projects to boost its cash flow and reduce debt, a senior company official said. DLF had a net debt of Rs 20,336 crore at the end of the December quarter. “We have a total of Rs 14,000-15,000 crore stocks. Out of this, Rs 4,000 crore is in finished projects and more than Rs 10,000 crore is unsold stocks in projects which are launched and are under development,” said DLF Chief Financial Officer (CFO) Ashok Tyagi.

These stocks would get monetised as and when the demand picks up resulting in improvement in cash-flow as well as reduction of debt, he said when asked about the company’s strategy to reduce the huge debt. Stating that sales have been “low” since last year, Tyagi said bookings would comfortably cross Rs 3,000 crore in this fiscal, lower than Rs 4,070 crore in the 2013-14 financial year.

DLF has achieved sales bookings of about Rs 2,700 crore till February 15 of the current fiscal. With property market showing sluggishness, Tyagi said the company is looking to raise about Rs 3,000 crore by selling about 50 per cent stake each in 4 housing projects to private equity firms.

“Since sales are slow, we are planning to raise about Rs 3,000 crore through private equity. In the short term, PE funds will be the substitute for the cash flow which would have normally come from sales,” Tyagi said.

Tyagi said only about Rs 6,500 crore debt pertains to development arm DevCo and the same would be eventually reduced with monetisation of these Rs 15,000 crore worth stocks. On reducing of about Rs 14,000 crore debt pertaining to rental business RentCo, DLF CFO said the company plans to launch two Real Estate Investment Trusts (REITs) to monetise the rent-generating commercial assets. The company earns an annual rental income of over Rs 2,000 crore from its office buildings and shopping malls covering about 30 million sq ft area. Last month, DLF had reported 9 per cent decline in consolidated net profit at Rs 131.79 crore for the quarter ended December against Rs 145.29 crore in the year-ago period. Income from operations fell 5 per cent to Rs 1,956.72 crore for the third quarter of this fiscal from Rs 2,058.42 crore in the corresponding period of the previous year.

Recently, Sebi slapped fines totalling Rs 86 crore on DLF, its top executives, their family members and various other related entities for entering into “sham transactions” to mislead IPO investors about eight years ago. DLF had said that it did not violate any laws and would challenge the order. The company had also said it was guided by the advice of “eminent legal advisors, merchant bankers and audit firms” while formulating its IPO documents. DLF has a land bank of about 295 million square feet, of which 50 million square feet is under development.

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Bharti to enter Residential Realty

Bharti Realty, the real estate arm of Sunil Bharti Mittal-led Bharti Enterprises, is gearing up to enter the premium residential market in FY16. While the overall real estate sector in India has seen muted growth in recent years, high-end residential projects have been high in demand.

The Tatas and Godrej are among the other big business houses that have presence in residential real estate.

Currently, Bharti Realty has projects in the retail and commercial segments and it is looking to enter the residential market starting with Delhi-national capital region (NCR).

“Bharti Realty is scouting for land in north India, especially in Delhi-NCR, for its first residential project. It might also form joint ventures with land owners for the same,” a person close to the development told the Business Standard.

He added that the company might also look at partnership with existing developers, especially cash-strapped ones looking for funds.

When contacted, a company spokesperson declined to comment.

In August last year, S K Sayal was appointed the new managing director and CEO of Bharti Realty for “conceptualising and implementing a scalable business strategy and providing overall leadership to the business”, an earlier statement from the company had said. Sayal would also explore and seek new business opportunities via joint development models to scale the realty business to the next level of growth, the statement had added.

Apart from telecom business, Bharti group has been in the news for its retail foray along with American chain Walmart through an equal partnership in cash-and-carry or wholesale business, and more recently for parting of ways.

Bharti continues to operate its retail chain Easyday, while the cash-and-carry business is now fully owned by Walmart. The group’s other interests included insurance and agro-products, where it could not meet the success of telecom and diluted stakes in its ventures.

Aviation was another area of interest, but had not entered the sector yet. Payment bank is its latest new business venture.

In commercial real estate, Worldmark – a high-end office-cum-retail project in Delhi’s upcoming Aerocity – will be functional soon offering 1.5 million sq feet of space.

Recently, Bharti Retail had launched its first mall, The Pavilion, in Ludhiana. Till now, the firm has delivered two million sq ft of commercial space in NCR, while another 3.5 million is under construction. It is also setting up a mixed use project in Kolkata, according to information available on the company website.

Even as India’s real estate sector is going through a slowdown phase, developers are hard-pressed for funds and inventory of unsold homes is piling up. According to experts, this is the right time to enter the sector as one would get a good deal on land valuation. And if it is lucky, the company would have its product offerings ready when the market revives.

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One of the best kept secrets of Indian real estate is out…

The Economic Survey for the last financial year states: “Data shows that the first claim upon the savings of households is physical assets such as gold and real estate.”

That Indians love their ‘real estate’ would be like stating the obvious. But sometimes it is necessary to state the obvious as well. Why? That will soon become clear.

AkhileshTilotia, a thematic research analyst with the institutional equities arm of the Kotak Mahindra Group, makes a very interesting point in his new book The Making of India—Gamechanging Transitions. As he writes: “Thanks to its love for real estate investments, India is in a curious position of having more houses than it has households.”

This becomes clear from the Census 2011 data. “India’s households increased by 60 million to 247 million from 187 million between 2001-2011. Reflecting India’s higher ‘physical’ savings, the number of houses went up by 81 million to 331 million from 250 million. The urban increases is telling: 38 million new houses for 24 million new households,” writes Tilotia.

So what is happening here? One explanation for the number of houses rising faster than the number of households may lie in the fact that houses are being bought as investment and not to be lived in. What this means is that many Indians own more than one house and then there are many more who do not own any, because prices are way beyond what they can afford. Further, given our penchant for owning real estate, a lot of real estate is being built sheerly from the point of view of fulfilling investment demand.

This is the best possible explanation for why the number of houses has gone up at a much faster pace than the number of households. Further, those who have black money to hide, don’t bother much about the location of where houses are being built. And that explains why houses even miles away from India’s biggest cities are so expensive.The Caravan magazine in a 2011 article, when real estate investment was at its peak, quoted Gautam Bhan, a consultant with the Indian Institute for Human Settlements, to make this point: “This economy is being built solely on speculation…These properties are being built solely for investment cycles. Why else would you build halfway to Agra? If you have ten businessmen who occasionally want to get rid of black money, you’ll have an apartment building. These flats will be bought and resold and bought and resold. Nobody even needs to live there.”

So what is the way out of this mess? How can houses be built and sold at prices so that people can buy them to live in them? As I have mentioned more than a few times in the past, the government needs to actively go after the black money hidden in physical assets like gold and real estate. There is no point in trying to actively pursue all the black money that has left the country and not do anything about all the black money lying in the country.

A crackdown on black money will lead to better tax compliance, meaning more taxes for the government. Further, it will also bring down the amount of black money that goes into real estate. This is easier said than done and will need solid political will for many years, if it has to be pursued seriously. Further, it is high time that agricultural income be brought under the tax net. There is no reason that rich farmers should not be paying income tax. In fact, in cities like Shimla, Chandigarh and even the National Capital Region, all the untaxed agricultural income chasing real estate has also been responsible for driving up home prices, among other things.

Ensuring affordable housing becomes available at a large scale level should be a major priority for the Narendra Modigovernment. As the Economic Survey points out: “Nearly 30 percent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030.” If affordable housing does not become the order of the day slums will become as common place in other cities, as they are currently in Mumbai. And that is not a happy thought to look forward to.

Also, as Tilotia points out in his book, “more than three-fourths of urban residents live cheek by jowl in cramped spaces.” This basically happens because of two reasons. The first reason is the low FSI ratio which has made land very expensive. The second reason is “the inability to commute cheaply and quickly, which means that people have to congregate in and around areas where they can find economic activity and public infrastructure.”

If affordable housing has to take off, all this needs to be set right.

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How to sell property during a slowdown

If you want to sell an apartment, you may find it a challenging task in the current scenario with the real estate market in India is passing through difficult times. But there are ways you can improve your odds.

Advertise locally first

When you are trying to sell an apartment, as a first step, localise your search. People who have lived on rent in the area and like it, or those who have relatives living in the neighbourhood, are more amenable to a purchase. If you live in an apartment complex, put up an ad on the notice board in the lobby or on the walls near the entrance. If you have to, pay a fee to the residents’ welfare association for the purpose. Also, advertise your decision to sell the apartment on online groups run by residents.

Then reach out to a wider audience

If a local pitch does not work, broaden your search. Experts say that you are better off informing a couple of brokers who have experience in the residential market and whose business comes largely from that area. “If you inform a lot of brokers, you may get enquiries from many of them for the same clients, causing confusion and wastage of time,” says Sajid, manager-residential services, Silverline Realty, a Bengaluru-based realty consultancy. Adds Sanjay Sharma, MD, Qubrex Realty, a Gurgaon-based real estate consultancy: “When you inform only a couple of brokers, they have greater incentive to work hard at finding clients on your behalf.”

When all else fails, list your property on realty portals. The advantage of this move is that you may find a buyer directly and save on brokerage fee. The downside is that you may be flooded by calls from many brokers, including the unethical ones.

Be flexible about pricing

First survey the prices of similar properties online. Beware that these prices can at times be misleading, as S G Raja Sekharan, a lecturer of Wealth Management at Bengaluru’s Christ University, found out when he was trying to help a friend sell his flat. “We first quoted a price based on what other sellers were quoting online. That turned out to be a mistake. We wasted six months before we realised that the actual price was 10% lower,” he says.

A good broker will help you arrive at the right price. “A professional broker will arrive at a price based on recent transactions and any improvements you may have made to the flat,” says Sajid.

A slow market calls for competitive pricing. Remember that prices in the secondary market are usually lower than in the primary market, so you must set your rate lower than what the builder is quoting for similar apartments. Past transactions may not always be an accurate guide. “You can’t always go by prices in deals that happened three months ago. The market may have moved further down since then, so you need to be flexible,” says Sharma.

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Make the apartment presentable

Spruce up the apartment before you let a buyer walk in through the front door. Have it painted. It should be clean and should smell good. Take care of small flaws such as leaking pipes and faucets. “First impressions do count. If the buyer steps into the flat and finds it in a shabby state, he could get turned off,” says Sharma. Sajid warns that flaws within the flat will give the buyer a handle to beat down the price. If defects exist, inform the buyer about them early on. “At a later stage, they could turn into potential dealbreakers,” says Raja Sekharan.

Sourse ET 16-02-15

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India’s real estate to need $ 257 billion investment by 2015

India’s real estate sector would need an investment of $ 257 billion by 2015, including Economic Weaker Section (EWS) housing, of which residential real estate alone would require $ 29 billion, says an EY-FICCI real estate report. “Investments required in the Indian real estate market by the year 2015, is approximately $ 42 billion (excluding EWS housing) and $ 257 billion (including EWS housing). Residential real estate alone will require an investment of $ 29 billion,” the report said. The Indian economy is ready to experiment with advanced funding options, such as real estate investment trusts (REITs) and provide industry players with a global competitive edge, said EY Tax partner (Real Estate Practice) Gaurav Karnik. “The contribution of the sector to country’s GDP has been estimated at 6.3% in 2013, and the segment is expected to generate 7.6 million jobs during the same period,” he said. However, due to macro-economic conditions, the Indian real estate sector across major cities is expected to see a mixed performance, the report said.

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What you actually pay for your dream home!

Buying a home does not only ensure financial security for you and your family, but also saves plenty of money that you would otherwise pay just for living in a rented house. During the past decade or so, home buying has picked up tremendously also because of the easy availability of home loans. Banks have, in fact, simplified the entire process of home loan financing in a bid to ride this wave, which comes with a huge sentimental aspiration.

Banks make money on the interest they charge on loans. Typically, up to 85% of the property value is provided as loan, while 15% margin has to be borne by the borrower using his/her own savings/resources.

A majority of home buyers take their purchase decision taking into consideration the EMI as their affordability factor. However, one pertinent question that usually haunts a home buyer is: ‘How much do I actually pay for my dream home?’

We are trying to answer this question with a real life example and for this we are decoding home loans under two heads — one is principal and interest, while the second one is tax implications.

Mr. Varma decided to buy a 3 BHK flat in an upcoming neighborhood in Hyderabad. The total cost of the flat, including amenities, was Rs 63, 00,000. As per norms, he paid 15% of the down payment amount using his cash reserves, which came to around Rs 9,45,000. He approached two different banks for availing a loan of Rs 53,55,000. One bank offered him the loan at 10.25% interest rate while the other loan was available at 10.15%. Obviously he decided to borrow from the bank which offered him loan at 10.15%. Duration of the home loan was 20 years, and the EMI came to around Rs 52,210.

Home Loan amount INR 53,55,000
Interest rate 10.15%
Duration 20 Years
EMI
INR 52,210

At the end of the loan tenure of 20 years – presuming that the interest rate remains the same — Mr. Varma would pay Rs 53, 55,000 as the principal amount, while a whopping sum of Rs 71,75,453 would be paid as interest. This means he would pay 135% of the total borrowed amount as interest alone!

The below table illustrates this:

Time Frame Interest Paid Principal Paid Outstanding Loan
1 Year INR 5,39,560 INR 86,961 INR 52,68,039
5 Years INR 25,94,942 INR 5,37,671 INR 48,17,329
10 Years INR 48,36,315 INR 14,28,910 INR 39,26,090
15 Years INR 64,91,618 INR 29,06,221 INR 24,48,779
20 Years INR 71,75,453 INR 53,55,000 INR 0

“From the table it is clear that the major component of EMIs paid to the bank in the early years of loan repayment is deducted as interest. At the end of the 5th year, Mr. Varma would pay an amount of Rs 25, 94,942 as interest, while the principal component is only Rs 5,37,671. If he continues to repay the loan over a span of 20 years, then the total amount to be paid to the bank comes out at around Rs 1,25,30,453,” says Nitin Vyakaranam, Founder and CEO, ArthaYantra, an online financial planning firm.

Now let us consider a situation where Mr. Varma has some surplus amount with him. Then he would have two options:

1. One, he can foreclose the loan by pre-paying it with his surplus amount. By pre-paying the loan amount, he will reduce the number of EMIs and can invest the amount saved from EMIs into diversified portfolios until he repays the loan.

2. The other option is he can continue with the same EMI and invest his total surplus amount into diversified portfolios.

Let us evaluate the consequences in both the scenarios:

Scenario 1:

In this scenario let us consider that he prepays an amount of Rs 5,00,000 at the end of the 5th year. Then his outstanding principal amount (ie, Rs 48,17,329) will get reduced to Rs 43,17,328 and the EMI of Rs 52,210 will get reduced to Rs 46,791 where he can save Rs 5,419 every month, which he invests into diversified portfolios. At the end of the loan tenure, he will save an amount of Rs 22,64,732 (assuming the rate of return at 10%) from the invested amount. Additionally, he will also save Rs 4,75,420 on interest. So, on the whole, he will save Rs 27,40,152 at the end of the loan tenure.

Scenario 2:

In this scenario let us assume that Mr Varma invests his surplus amount of Rs 5,00,000 into diversified portfolios and continues with the same EMI for loan repayment. In this case he will save Rs 20,88,642 (assuming the rate of return at 10%), which is lesser than the amount saved in the first scenario.

“Therefore, out of the two options, it’s advisable to choose the first option because that will not only help you save more amount, but also reduce your liability to a great extent,” advises Mr Vyakaranam.

What is more, home loan repayments also attract tax benefits. So, under Section 80C of the I-T Act, tax deduction up to Rs 1.5 lakh can be availed for repayment of the principal amount. Under Section 24B, tax deduction of up to Rs 2 lakh can be availed on the interest paid for home loan for a self-occupied home. In case a loan is availed for a second home or property which is not self-occupied, then the actual interest paid for the year is allowed for deduction under Section 24B.

Conclusion

Taking a home loan is a long-term debt commitment. So, it is advisable to go for a home loan which you can manage with your existing finances. Although a lot of efforts are being made by the banks to make borrowing lucrative, but care should be taken to understand that there are a lot of hidden costs involved like pre-payment charges, processing charges, and foreclosure charges, among others. It is, therefore, always wise to choose a home loan which will not disturb your financial health.

Sanjeev Sinha, Economic Times

 

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