Buying
a house : Bank loan is your best bet
The
lender not only conducts due diligence for the property, but you can also avail
of tax deductions.
Hariprasad
Nair, a sales representative with a reputed multinational company, has saved
enough money to buy a small house in a suburb of Mumbai. However, he has
decided to take a bank loan to fund a part of his purchase. “The 1-BHK house I
want to buy costs around 15 lakh. Though I can arrange for the money through my
savings and by borrowing from friends, I prefer to take a loan worth 5-6 lakh,”
says the 36-year-old.
Nair’s reasoning is that since he doesn’t have the time to check on the property title and documentation, and doesn’t want to trust the broker implicitly, it will be better for him to pass on this job to a bank. “I don’t have the information or the time to exercise due diligence as far as the property is concerned. As the bank needs to safeguard its money, it will carry out a more detailed scrutiny, and furnish me the loan only after it is fully assured,” he adds.
Safety checks
A loan is often the only financially viable method for a person to fund a massive purchase like a house. However, as Nair has discovered, there are other advantages of taking a loan. Real estate experts believe that buying property through a home loan ensures some level of safety to the property buyer. Says Sandeep Sadh, chief executive officer of mumbaipropertyexchange.com: “The potential buyer is saved the time and hassle required to check the authenticity of the title and the various documents of the property.”
Anuj Puri, chairman & country head, Jones Lang LaSalle India, cautions that though banks exercise due diligence for any property that a prospective home loan borrower intends to purchase, it’s depth often varies among banks. “Taking a home loan does provide a reasonable safety net for the buyer most of the times. However, it is prudent for the buyer to examine the property’s antecedents himself if he has any doubt,” adds Puri.
Financial/tax benefits
Ganesh Vasudevan, chief executive officer of Chennai-based Indiaproperty.com, explains that purchasing a property through a bank loan also provides financial efficiency to the buyer. “Today, home loans are available at 10.5-11% interest rate. If you factor in the inflation of 7-8% a year, which will push up
the property
prices much
higher in the future, taking a loan now seems to be a win–win situation for the buyer,” he says.
Apart from the fact that a bank’s due diligence amounts to a legal check for the property, there are significant tax benefits available on a home loan. The mortgage payments by the borrower help him get tax deductions from his total taxable income. The equated monthly instalment (EMI) comprises two components—principal and interest—both of which qualify for tax deductions.
Under Section 80C of the Income Tax Act, a borrower can get a deduction for a maximum of 1 lakh for the principal amount paid each year, irrespective of his tax bracket. Under Section 24(b), the borrower can claim tax deduction of up
to 1.5 lakh a year
for the interest
paid.
If the buyer books a house that is still under construction and gets partial disbursement of loan according to the stages of completion, he can still claim tax benefits. Though he is not eligible for tax deductions till he actually gets the possession (even if he has begun repaying the loan), the interest paid can be claimed as deduction after receiving the possession. Under Section 24, the interest paid during the construction phase can be claimed as deduction in five equal instalments, subject to the upper limit of 1.5 lakh.
In case two people are buying a house jointly, they can opt for a home loan together. The benefit is that both of them will be able to avail of the tax benefits on the joint loan. Since the maximum tax deduction available to a single borrower is 1.5 lakh and this applies to each borrower, the total deduction will be 3 lakh. If the interest paid for that assessment year is less than 1.5 lakh, the couple can share the benefit according to the amount contributed by each for the mortgage payment.
Disadvantages
Though taking a home loan from a
bank seems to be a beneficial move,
there are some pitfalls that
borrowers should be aware of.
• Better discounts on lump-sum
deals
When it comes to negotiating the price
of a property, buyers with ready cash
always have an edge over those who fund their purchase through a home loan. This is because the former can expect an additional discount of 5-10%.
• Five-year sale restriction
If you sell the property within five years of the end of the financial year in which you purchase it, all the deductions claimed under Section 80C with respect to the property will be added to your taxable income in the year that you sell it. This means that the deduction in terms of the interest and principal will be added to your taxable income. Suppose you sell the property after four years of buying it and avail of the maximum deduction in terms of the principal amount and interest repaid, then 10 lakh ( 2.5 lakh deduction each for four years) will be added to your taxable income. If you are in the highest tax bracket you will end up paying an additional tax of 3 lakh.
What if the bank rejects the house?
“One reason that the bank may not approve of the house is that it is not satisfied with the revelation from its due diligence of the property, or that the price stated is excessive. If this is the case, the aspiring buyer should take heed of the implications and perhaps not invest in the house,” says Puri.
Another reason could be that the buyer’s credit worthiness has come into question. “In such a case, the borrower should check his credit score and try to repair it (in terms of the outstanding credit card bills, existing loans, etc) before approaching the same bank again or taking a loan from another lender,” adds Puri.
Before you take a home loan
• While selecting a home loan lender, check for the various terms and conditions, and charges regarding the loan.
• Don’t choose a lender till you have identified a property.
• You should be able to fund 25-35% of the cost of the house yourself.
• Approach at least three lenders, get their figures for all fees and charges, and then bargain.
• Apart from the interest rates, check up on the various charges, such as processing fees and valuation fees.
Nair’s reasoning is that since he doesn’t have the time to check on the property title and documentation, and doesn’t want to trust the broker implicitly, it will be better for him to pass on this job to a bank. “I don’t have the information or the time to exercise due diligence as far as the property is concerned. As the bank needs to safeguard its money, it will carry out a more detailed scrutiny, and furnish me the loan only after it is fully assured,” he adds.
Safety checks
A loan is often the only financially viable method for a person to fund a massive purchase like a house. However, as Nair has discovered, there are other advantages of taking a loan. Real estate experts believe that buying property through a home loan ensures some level of safety to the property buyer. Says Sandeep Sadh, chief executive officer of mumbaipropertyexchange.com: “The potential buyer is saved the time and hassle required to check the authenticity of the title and the various documents of the property.”
Anuj Puri, chairman & country head, Jones Lang LaSalle India, cautions that though banks exercise due diligence for any property that a prospective home loan borrower intends to purchase, it’s depth often varies among banks. “Taking a home loan does provide a reasonable safety net for the buyer most of the times. However, it is prudent for the buyer to examine the property’s antecedents himself if he has any doubt,” adds Puri.
Financial/tax benefits
Ganesh Vasudevan, chief executive officer of Chennai-based Indiaproperty.com, explains that purchasing a property through a bank loan also provides financial efficiency to the buyer. “Today, home loans are available at 10.5-11% interest rate. If you factor in the inflation of 7-8% a year, which will push up
the property
prices much
higher in the future, taking a loan now seems to be a win–win situation for the buyer,” he says.
Apart from the fact that a bank’s due diligence amounts to a legal check for the property, there are significant tax benefits available on a home loan. The mortgage payments by the borrower help him get tax deductions from his total taxable income. The equated monthly instalment (EMI) comprises two components—principal and interest—both of which qualify for tax deductions.
Under Section 80C of the Income Tax Act, a borrower can get a deduction for a maximum of 1 lakh for the principal amount paid each year, irrespective of his tax bracket. Under Section 24(b), the borrower can claim tax deduction of up
to 1.5 lakh a year
for the interest
paid.
If the buyer books a house that is still under construction and gets partial disbursement of loan according to the stages of completion, he can still claim tax benefits. Though he is not eligible for tax deductions till he actually gets the possession (even if he has begun repaying the loan), the interest paid can be claimed as deduction after receiving the possession. Under Section 24, the interest paid during the construction phase can be claimed as deduction in five equal instalments, subject to the upper limit of 1.5 lakh.
In case two people are buying a house jointly, they can opt for a home loan together. The benefit is that both of them will be able to avail of the tax benefits on the joint loan. Since the maximum tax deduction available to a single borrower is 1.5 lakh and this applies to each borrower, the total deduction will be 3 lakh. If the interest paid for that assessment year is less than 1.5 lakh, the couple can share the benefit according to the amount contributed by each for the mortgage payment.
Disadvantages
Though taking a home loan from a
bank seems to be a beneficial move,
there are some pitfalls that
borrowers should be aware of.
• Better discounts on lump-sum
deals
When it comes to negotiating the price
of a property, buyers with ready cash
always have an edge over those who fund their purchase through a home loan. This is because the former can expect an additional discount of 5-10%.
• Five-year sale restriction
If you sell the property within five years of the end of the financial year in which you purchase it, all the deductions claimed under Section 80C with respect to the property will be added to your taxable income in the year that you sell it. This means that the deduction in terms of the interest and principal will be added to your taxable income. Suppose you sell the property after four years of buying it and avail of the maximum deduction in terms of the principal amount and interest repaid, then 10 lakh ( 2.5 lakh deduction each for four years) will be added to your taxable income. If you are in the highest tax bracket you will end up paying an additional tax of 3 lakh.
What if the bank rejects the house?
“One reason that the bank may not approve of the house is that it is not satisfied with the revelation from its due diligence of the property, or that the price stated is excessive. If this is the case, the aspiring buyer should take heed of the implications and perhaps not invest in the house,” says Puri.
Another reason could be that the buyer’s credit worthiness has come into question. “In such a case, the borrower should check his credit score and try to repair it (in terms of the outstanding credit card bills, existing loans, etc) before approaching the same bank again or taking a loan from another lender,” adds Puri.
Before you take a home loan
• While selecting a home loan lender, check for the various terms and conditions, and charges regarding the loan.
• Don’t choose a lender till you have identified a property.
• You should be able to fund 25-35% of the cost of the house yourself.
• Approach at least three lenders, get their figures for all fees and charges, and then bargain.
• Apart from the interest rates, check up on the various charges, such as processing fees and valuation fees.
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