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faqs
Finance > Personal Finance > Investment in
Real Estate
Investing in real estate
Overall it seems the right time
to invest in property. Rates in the property market are showing signs of
stabilising. Latest budget also has been friendly. The union Budget
1999-2000 has raised, tax exemption ceiling for interest on loans for self
occupied dwellings, from Rs. 30,000 to Rs. 75,000.
Methods of purchase
An immovable property in India can be bought either through freehold or leasehold. Freehold property refers to land owned by an individual. The government has no overriding title here. In leasehold property, government bodies or agencies normally own land and the title or right of usage is passed on to the person buying it. Generally, the property is leased for a period of 99 years, at the end of which the land reverts to the government body unless the lease is renewed.
The property, either freehold or leasehold can be bought through two types of transactions: sales deed and power of attorney. In most cities, the transfer or sale of property is through power of attorney. In this case, the title does not technically get transferred in the buyer's name. Therefore, the buyer does not have to bear the additional expense of stamp duty, which may be as high as 16 per cent of the sale price in some states. Power of attorney is accepted by the market but has no legal backing. It only gives possession without title.
Power of attorney
The buyer takes an irrevocable special power of attorney from the owner appointing the buyer as his nominated attorney to deal with all matters relating to the property including execution of the sale deed. However, the banks generally do not recognise power of attorney as a legal title and it may not be possible to raise money against such property.
Sources of finance
Housing finance can be raised from banks, housing finance companies. HDFC dominates the housing finance sector with 45% market share, followed by HUDCO with 21% and LIC Housing with 16% share. Other major players include SBI Homes promoted by SBI and Can Fin Homes Promoted by Canara Bank - Gujarat Rural Housing Corporation promoted by HDFC. DEWAN Housing is the only major private sector company.
Collateral Securty
Collateral is generally sought in the form of an insurance policy, and whether an HFC insists on it depends on how confident it is about your loan repayment capability. This is judged in terms of the job you hold down, the company you work for, career prospects and suchlike.
An LIC policy in hand could mean a saving of 0.25 - 0.50 percentage points on a LICHF housing loan. LICHF does score over others on two counts. One, unlike its competitors, which charge penal interest on the prepaid amount, LICHF does not charge prepayment penalty after five years of taking the loan. Two, LICHF allows you to repay the loan through the repayment by policy money method. Thus, if you have taken insurance cover, you needn't pay back the principal amount in installments during the term of the loan; you can settle the principal on maturity of your policy. You should have life insurance cover equal to the loan amount, not any specific policy. Buy cheaper plans such as Bima Kiran and Bima Sandesh, which come under the low premium, high-risk category. Another option is to buy Jeevan Griha with triple cover. This plan allows you to buy thrice the cover for the same premium as a normal endowment plan.
Interest rates
Interest rate varies. Competition among the players have brought the interests at all time low levels.
Procedures & Requirements
When approaching a bank or HFC one should carry Identification (Ration card or Voter I-card), Salary certificate if employed, Audited financial statements, tax returns. Also in some cases one should be ready with guarantors also. In case of a flat for resale, allotment letter from society/association of society or approved drawings of proposed construction if building is under construction. Agreement for sale between builder and purchaser-borrower will also be required. One should also be aware that initial disbursement is made only after borrower brings his/her full contribution. Further disbursement are linked to Lender's assessment of progress of construction.
To avail of the loan one has to provide first mortgage of property by way of deposit of title deeds HDFC asks for the mortgage papers only for loans higher than Rs 50,000. For smaller loans the institution is content with some alternative security, such as an LIC policy. Time taken to sanction may be quickest with HDFC (3-5 days), while banks may take nearly 3 weeks.
To give an idea following are the comparative features of major players in the market.
|
|
HDFC |
LIC HSG |
GIC HSG |
|
Amount Financed |
85% |
80% |
80% |
|
Interest rates calculated |
Annually |
Annually |
Monthly |
|
Processing charges(% of loan) |
0.8 |
0.8 |
0.8 |
|
Administration charges |
1% |
1% |
1% |
|
No of guarantors |
2 |
2 |
1 |
|
Prepayment charges |
2% of amount |
1% if before 5 Years |
Nil |
|
|
(Above indicators are subject to change and need to be checked at the time of seeking loan)