Low price hike in cities is an investor’s concern while the end users rejoice

The real estate sector has really girdled up the loin and has reduced the prices of the properties in an attempt to surge demand. Not only that due to factors like unsold inventory, over supply and others the prices in cities are recorded to be stooping lower. The trend watchers say that this decline in prices has pushed investors out of the realty market and this is the time the end users are rejoicing. The prices in few cities have become stagnant and in few other cases the realtors and the builders are offering distress discounts. The investors say that they are unable to come out or exit out of the multiple investments they have done in the properties in the last few years. This is increasing the pain of the investors.

In cities like Mumbai the average surge in residential prices have been of the order of mere 3.3 percent in the year 2015 but in contrast the hike in prices in 2014 was 7 percent. This was pointed out by a study conducted by the global property consultant JLL India. The same situation is noted in the cities where the problems arises in the realty sector like Bengaluru, Chennai and Delhi-NCR which are big investor markets. The report of JLL says that all these markets have witnessed a surge in prices in the range of 2 percent in the last quarter of 2015.

The experts opine that the signs of maturity of any realty market is slow and gradual increase of prices which is somewhat similar to the situation of financial capital markets. The cities of the nation also shows similar kind of situation says the top officials of JLL India. The forecast for the y-o-y increase percentage for the city of Mumbai was 6 to 7 percent for 2015. The forecasted increase for the year 2016 was predicted as 6 percent as well. But the actual increase as says the experts, is expected to be much lesser. In such a situation the investors are not getting much of confidence to invest but it is a great time for the end users opines many. The investors feel on top of it that there is a trend of negative appreciation of properties in the realty market today.

The subject matter experts from Estate Agents Association of India opined that the current realty market does not offer any incentive for investors in the real estate market. The reason is the annual appreciation of properties in the major cities of India is lesser than 5 percent and the yield on lease rental is about 1.5 percent per annum. That is the main reason for the investor’s reluctance in investment in the realty sector. But the association sources opined that there are better instances also which has shown better appreciation percentages like Kolkata, Pune and Hyderabad where the annual hike in prices has been of the range of 5 to 10 percent.

In Mumbai the estimates at the sub market levels reveal that South Central and the Eastern suburbs witnessed an appreciation of 4.3 and 4 percent respectively. The hike in prices in Northern Mumbai was noted to be 3.9 percent and that in the western suburbs was recorded at 3.5 percent. Outside the cities the appreciation noted was in the order of 3 percent. The appreciation noted in Navi Mumbai was in the order of 6 percent.

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.

Know your investments here

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.