Ashish Senapati's budget for a dream house in his hometown Kolkata is between Rs 45 and 50 lakh. This translates into a down payment of Rs 9-10 lakh. Towards this end, he has been saving for two years, collecting close to Rs 5 lakh. He intends to fill the gap by withdrawing half of his public provident fund (PPF) corpus, which completes six years in a month.
Unfortunately, that won't be enough now. Reason: The Reserve Bank of India (RBI) has disallowed banks from lending on an inflated property cost (with stamp duty and registration fee added to the agreement value). Stamp duty in Kolkata stands at seven per cent and registration fee 1.1 per cent. So, a house valued at Rs 50 lakh will require Rs 4 lakh over a down payment of Rs 10 lakh. This cost could vary between Rs 2 lakh and Rs 5 lakh.
Senapati is in a fix. "I cannot delay my decision, as I had timed the purchase with father's retirement," he rues. His contingency plan? "I will ask my father to help, as he will receive a huge corpus on retirement," he says. Quite expected and most common.
But, those who don't have this option can go the personal loan way or borrow against investments, break these or try and look for lenders agreeing to pay the higher loan-to-value (LTV).
Industry experts say it is a standard practice to lend on the agreement price plus stamp duty and registration fee. Housing finance companies (HFCs) like LIC Housing Finance and HDFC could be the way out for borrowers, as these do not fall under the purview of the RBI. They fall under the control of the National Housing Board (NHB), which so far does not have any such norm.
Says R V Verma, CMD of NHB, "There is no separate norm on this, but housing finance companies are supposed to calculate the LTV only on the property price. We assume the companies are following this."
He added that the regulating board monitors the companies' practices.
The website of LIC Housing Finance states the loan-to-property cost as 85 per cent of the total cost of the property, including stamp duty and registration charges, for a loan of up to Rs 20 lakh and 80 per cent of the total cost, including stamp duty and registration charges, for a housing loan of over Rs 20 lakh.
This will be the cheapest amongst the options available. Sample this: Senapati will get a loan of Rs 40 lakh at a floating rate of 10.75 per cent from HDFC, according to BankBazaar.com. Equated Monthly Instalment (EMI) = Rs 40,609. Even if he opts for a fixed-cum-floating loan at 11.25 per cent till 2014 (and 11 per cent thereafter), HDFC will charge Rs 41,970 till 2014 and Rs 41,343 subsequently. At 11.5 per cent till 2016 (and 11 per cent thereafter), it will charge Rs 42,657 now and Rs 41,491 later.
In comparison, a bank will first look at the actual property cost. Say, it is Rs 45 lakh. With Axis Bank's 11 per cent floating rate, Senapati will pay Rs 37,159 a month. If the Rs 5 lakh is raised through a personal loan for three years, the EMI would be Rs 19,160 at 22.25 per cent rate. Total = Rs 56,319.
If he borrows against investments, say fixed deposits, (FDs) Senapati will pay 2-2.5 per cent over the FD rate on the amount drawn, assuming he has a deposit of Rs 5 lakh, earning an interest of 10.5 per cent a year. At 25 per cent margin, he will draw Rs 3.75 lakh at 12-12.5 per cent. One, this amount will not be sufficient. Two, it will be an additional burden.
In the present scenario, it make sense to borrow from a housing finance company, says Harsh Roongta of apnapaisa.com.
"However, this regulatory arbitrage may not last long. NHB may not wait beyond a couple of months to come out with similar guidelines, as this is a common practice among lenders," he adds.
Therefore, while you may approach an HFC if you are closing a deal immediately, you would be better off waiting and saving up a little more. But, those running against a deadline may have to take the expensive route or break investments for a penalty of one to two per cent.
