How much do you end up paying on a home loan?

In buying a home you do not only end up procuring more financial security for you and the family but you also save lot of money that would have otherwise being paid as rent to the landlord. Due to the rampant migration in the cities of India and many shifting their location for job and education there is a necessity of new homes which has further being boosted by the easy availability of home loans.

In an attempt to ride this wave the banks have simplified the procedure for home loan financing which had lot of borrowers in the last decade. Banks finance typically up to 85 percent of the property value and the rest 15 percent has to be borne by the buyer or the borrower using his or her own finances.

The home buyers look at the interest rate and the equal monthly installments as the major affordability factor. Even then a pertinent question that haunts all the home buyers is ‘How much did I end up paying for my dream home?’

This answer has two components one of which is the interest and the principal that the buyer has to pay and next is the tax implications. We will analyze the issue from both angles.

Mr. Sharma decided to buy a 3 BHK apartment in a posh locality of Bengaluru and he got the apartment comparatively cheaper at a price of Rs. 63, 00, 000.  He paid the 15 percent of the full amount as the down payment which is Rs. 9, 45, 000.  The remaining amount which comes to Rs. 53, 55, 000 had been borrowed from a bank by Mr. Sharma at a lower rate of 10.15 percent as the other bank offered him a higher rate of interest of 10.25 percent. The full tenure of the loan was twenty years and the Equal Monthly Installment (EMIs) for Mr. Sharma came to about Rs. 52, 210.

For a home loan amount of Rs. 53, 55, 000 at the rate of interest of 10.15 percent for duration of 20 years EMI will come to about Rs. 52, 210. At the end of the tenure of the home loan period assuming that the rate of interest is fixed Mr. Sharma will have to end up paying a whooping sum of Rs. 71, 75, 453 as interest which makes him pay 135 percent of the principal amount which is about Rs. 1, 25, 30,453. 

How could Mr. Sharma possible avoid this situation? This would have necessitated an extra surplus amount that Mr. Sharma needs to invest.

The first option with Mr. Sharma is to foreclose the loan amount by pre-paying it with some amount from his savings. By doing this he can invest the amount saved from the lesser EMIs in different portfolio till he repays the full loan amount.

The second option is, he can invest his savings or the surplus amount somewhere in a diversified portfolio and continue with the same EMIs that he was paying.

Let us evaluate both the instances and scenarios and do a comparative analysis.

The first instance:

If we consider that he prepays an amount of Rs. 5 lakhs by the end of the 5^th year, his outstanding principal amount Rs. 48, 17, 328 will be reduced to Rs. 43, 17, 328 and subsequently the EMI will get reduced to Rs. 46, 791 where he can save up to Rs. 5, 419 per month which Mr. Sharma can invest into diversified portfolios. This will make Mr. Sharma save an amount of Rs. 22, 64, 732 at the end of the loan tenure and will additionally save Rs. 4, 75, 420 on interest. In total this will make him save a total amount of Rs. 27, 40, 152 at the end of 20 years.

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The second instance:

In the second instance let’s assume that Mr. Sharma invests his savings and the surplus amount of Rs. 5, 00, 000 into diversified portfolios and continues paying the same EMIs for repayment of the loan amount. Assuming that the rate of return is 10 percent and he saves Rs. 20, 88, 642 which is still lesser than the amount of the first instance.  

As we see the first option is much more advisable out of the two options at hand which will not only allow to save more money but also reduce the liability of the loan to a great extent.

Home loan repayment also entitles one of tax benefits under section 80 C of the IT Act. which can be availed for the repayment of the principal amount. Section 24 B entitles one to get a tax benefit and a deduction of Rs. 2 lakhs which can be availed for the interest paid on the self-occupied home. Under section 24 B the interest paid on a loan for a second home is allowed for deduction.

Outlook:

Going for a home loan is a long term commitment of liability and thus one should go for a loan that is manageable in one’s finances. There are indeed lucrative offers given by the banks to increase the borrowers but one should be careful about the hidden cost. It is always wise to choose a home loan product that does not disturb one’s financial standing. 

Are legal checks mandatory for new properties?

Due diligence is an essential part of property purchase be it commercial or residential property especially in India where litigations are on the rise. When one thinks of owning or investing in a new property which is a crucial process and involves lot of money as well one should necessarily take precautionary measures just to avoid future litigations.

Few of the mandatory checks that a purchaser while buying property needs to do are:

• Check whether the title is clear.
• Check that there is no encumbrance on the property. 
• Check that the property is not mortgaged. 
• Check that the property is constructed according to the approved plans.
• Check the Completion Certificate (CC) and the Occupancy Certificate (OC) in case of newly constructed properties. 
• Ensure that there isn’t any builder’s loan pending on the property and if at all there is a loan, insists on a bank NOC. 

The realtors suggest certain guidelines and state that it’s legally not advisable to buy a property at the pre-launch stage although the offer may seem lucrative as the prices are low but there are no legal rights or interests being created at this stage. Even if someone buys a resale property one should still insist on the original legal deeds and should get a proper due diligence conducted on the property to ensure that there are no encumbrances. 

 
When the experts were asked about the ways of checking the authenticity of a property claimed by the builders the answer was to get a thorough due diligence done both from legal and technical point of view.

 
Regarding the credibility check of a local builder the experts feel that there is no steadfast way to do it. The ways are that one can get the financials audited by a Chartered Accountant if the builder allows. Although a good track record for the last three or four years may indicate that there was good financial standing. Searching on Google on the internet about the builder can be a better option. Different aggregator sites and review sites can be browsed by checking the reviews about the builder. 
The question often arises in the minds of the customers that whether they should trust reputed builders. The people who are already stuck in legal hassles can get recourse which depends upon the termination clause which is there in the agreement being entered into. In case the seller represents a clear and sellable title, one may adopt proceedings. In case the property is being bought with the knowledge of the legal hassles then negotiation and amicable and mutual settlement may be of help. 

 In case one is buying a land plot with the Gram Panchayat one should ensure that the proposed plot is properly demarcated and a separate revenue card is available for that particular plot. A thorough due diligence regarding that plot is strongly advisable. 

The expert’s advice to the seller is one should give the photocopy of the title documents to the proposed buyer. However the seller should collect a sum as earnest money deposit to ensure the authenticity of the buyer. 

Not withstanding all these hassles and the paraphernalia attached with the purchase of the property one must keep in mind that buying a property is a lifetime affair involving one’s life time saving. If one have to spend few more bucks in due diligence and investigation it is always advisable rather than getting stuck in legal hassles later.