[ecis2016.org] Home loan instalments paid on an under-construction property, are based on a ‘margin share’ principle. Here’s a look at how this works and other points that applicants need to consider
Generally, it is observed that people who opt for affordable homes, are also first-time home buyers. Therefore, they need proper guidance and financial support to make the right decision.
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“Interest rates on home loans are relatively lesser than that levied on other purchases. The government also offers various tax benefits and other incentives to encourage the purchase of homes. Moreover, real estate investments are relatively more stable and offer higher appreciation than other segments,” explains Kalpesh Maroo, partner, BMR & Associates LLP.
Misconceptions about loan disbursement
Some buyers have a misconception that they can pay the instalments to the builder, using the bank’s funds at the outset and contribute their own funds towards the latter stages.
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How it actually works
While buying a property on loan, the applicant has to first put his own share of funds in the pool and maintain the agreed margin share with the bank (for example, 60:40). Only then, will the bank disburse the instalment to the builder. Please check the illustration table given below:
| Stage | Instalment due to the builder (Rs in lakhs) | Bank’s share (Rs in lakhs) (60%) | Own share (Rs in lakhs) (40%) |
| 1 | 5 (Booking) | 0 | 5 |
| 2 | 10 | 9 | 1 |
| 3 | 10 | 6 | 4 |
| 4 | 10 | 6 | 4 |
| 5 | 10 | 6 | 4 |
| 6 | 5 | 3 | 2 |
| Total Payment | 50 | 30 | 20 |
In the stage 2 (refer to the illustration), the buyer may mistakenly assume that the bank would pay the entire instalment of Rs 10 lakh to the developer. However, the buyer first contributes Rs 1 lakh to the pool, while the bank puts Rs 9 lakhs (60% of (5+10)), to pay the builder’s instalment. Remember that you are required to pay the margin percentage each time the bank makes a payment to the builder and maintain the agreed margin ratio.
Selecting a home loan provider
According to experts, buyers should select a home loan provider who offers:
- Lower interest rates
- Minimum processing fees
- Speedy loan disbursal
- No hidden charges
- Easy home loan eligibility norms
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“Generally, public sector banks are more transparent and do not have any hidden costs. Their home loan rates are quite competitive. However, they do proper due diligence and may take some time to disburse the loan. It is advisable to get a pre-approval before buying the house, to avoid any delays,” says Surabhi Arora, associate director – research, Colliers International.
There are two categories for home loans in the affordable housing segment:
- Home loans up to Rs 50 lakhs for property value up to Rs 65 lakhs in category A towns
- Home loans up to Rs 40 lakhs for property value up to Rs 50 lakhs in category B towns
Current home loan interest rates
| Bank | Loans <= Rs 30 lakhs | Loans > Rs 30 lakhs but <= Rs 75 lakhs |
| Floating Rates: | ||
| ICICI Bank | 9.4-9.45 | 9.45 |
| Indian Bank | 9.65 | 9.65 |
| IDBI Bank | 9.75 | 9.75 |
| Punjab National Bank | 9.45 | 9.45 |
| Fixed Rates: | ||
| ICICI bank | 9.5-9.75 | 9.55-10.1 |
| Indian Bank | 10.65 | 10.65 |
| IDBI bank | 10.25-10.5 | 10.5 |
| Punjab National Bank | 9.95 | 9.95 |
*Data taken from the respective bank’s website as on 22nd April, 2016
Factors to consider
- Budget: The buyer should be able to service all debts and meet his regular day-to-day expenses.
- Location: The buyer should ensure that the location of the property has adequate physical and social infrastructure.
- Size: The buyer should consider the number of occupants who will reside in the house and select an appropriately-sized unit.
- Delays in possession: The buyer should have a contingency plan in place to meet possible delays while buying an under-construction home. It is advisable to consider project delays of at least 1-2 years before calculating the EMI burden.
- Financing options: The buyer should ensure an optimum mix of debt and one’s own funds while borrowing. One can use a home loan EMI calculator to ascertain the correct mix. Experts caution that one’s EMI should not exceed 50% of your income.
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