Getting a Home Loan - Facts for Real Estate Investors in India

For the last 7 years, real estate market in Asia, especially India is booming due to large scale construction of affordable builder flats, apartments, villas, and farm houses and this has given birth to thousands of small and large-scale real estate investors. Real estate investors list is huge and there is a tough competition in the real estate market. Some are professional property investors and some become an investor spending their extra money and getting a mortgage loan for buying real estate in hot property locations like Delhi NCR and Mumbai suburbs. The property prices inside metros are already high towards the saturation point and not suitable for real estate investment. This is the reason why many working professionals have switched over to residential areas outlying major cities. There are several other reasons of investing in builder flats in NCRs or suburbs which include systematic layout of colonies, ample space for parking, security, well maintained parks inside the colony, provision of elevators, wide roads, better connectivity with major landmarks, etc. All these positive points increase the value of residential or commercial property at very high rates as compared to inside cities or major metros where is there is no space for parking, unorganized layout of colonies, no provision of elevators, chaotic traffic conditions, etc.

Also, most investors buy real estate with the aid of home loans with interest rates, which were around 6.5% in 2004 and have nearly doubled in 2010. Some nationalized banks like Oriental Bank of Commerce, Punjab National Bank, and State Bank of India are offering home loan interest rates still at 9% to 10% whereas private banks like ICICI, HDFC, etc. are offering home loans at 11% to 13.75%. This is the reason why deciding about getting a home loan from a certain bank has become important for real estate investors, so below are some facts on home loans, banks, and builders which will help investors in planning their budgets and investing strategies:

• Number one fact is that for getting a home loan for resale property, you will get a loan only if the property is freehold or the selling party is the first allottee. Also, for a resale property, you can avail home loans and also the tax benefits. There is no place in IT Act saying loans would not be given to resale property. But, it is easy to get loans for a newly constructed house, directly buying from builder, as he will get ready with all the documents that are needed, which may not be the case with the resale property.
• Second fact is that for builder flats under construction, getting full advance disbursement for home loan is better than partial disbursement (paying Pre-EMI) if you have made more than 80% disbursement, but most of the banks do not allow this. Banks say that it depends on the builder’s creditability. A few months back, an ICICI bank executive told me that they will be paying full disbursement only to some renowned builders empaneled on their list even if possession is due for 2 years. Banks insist for partial disbursement (construction linked) and Pre-EMI payment. They give a valid point in support that builder may delay possession once he gets full money in advance. Even he can downgrade construction quality. In this case, neither bank, nor borrower can do anything. So even if you are paying simple interest in Pre-EMI, it is beneficial in long term. Banks give full disbursement in cases where flat construction is almost 85% complete and builder reputation is good.

• Third fact is that regarding installment payments, partial disbursement and full EMI, banks reject saying it is not possible. Either you take pre-EMI with partial disbursement and Full-EMI with full disbursement, but still there are public sector banks like LIC who are allowing partial disbursement and full EMI. (I did this when I took a loan from LIC for buying a flat in Indirapuram for investment purposes).
• Fourth fact is that if you are buying a resale property for 16 lakhs and you are registering it at 9 lakhs, then the bank will issue two checks, one for 9 lakhs in the name of builder and another for 3 lakhs, which can be in the name of buyer or builder for extension of flat and only a few private banks are doing this. (ICICI did this for me when I took a home loan from them in 2005 for residential purposes). But Nationalized banks/institutions are very strict on this.
• Fifth fact is that you may be able to even convince your bank to give you a draft in the builder’s name, instead of giving money directly to the builder. You can then submit the draft to the builder only after you are satisfied with the construction progress, as by doing this, you will have some negotiating power in your hands.

• Sixth fact is that if you want to buy property worth 10 crores, banks will be designing an agreement according to your wishes, and listening to your points, etc. but if you are getting a home loan just for 10 lakhs, you just have to listen to them.

So above were some real facts on home loan processing, prepayments, installments, and disbursements. In the above article, I also talked about the general idea of investment in real estates and why people are switching towards buying properties in outskirts of cities. In my next article, I will compare different types of home loans, especially public home loan providers versus private home loan providers. I have taken home loans from both LIC Housing Finance and ICICI Bank so both these banks will be the first one that I will compare in my upcoming article.