The Impact of Demonetization on Property Deals May Lead to Cheaper Loans

The Indian real estate segment, hit hard by the demonetization move, is hoping to revive its fortunes in the form of cheaper loans once the financial system becomes stable. The Reserve Bank of India is likely to ease its monetary policy to give the sector a boost, which in turn could result in reduced lending rates and easier housing loans in India.

Demonetization and the Secondary Property Market

The latest government action aimed at curbing illicit transactions has had a catastrophic impact on all property deals involving black money. Earlier, many developers and property owners used to insist on the use of hard cash for payment of a significant component of the price of any deal. This has stopped post demonetization, resulting in a sharp fall in real estate prices in certain areas.

While secondary market deals have been hit by demonetization, investment in new property has also been negatively impacted by the uncertainty in the minds of the people of India. More and more people are choosing to wait before using their funds to buy property. This, in turn, is resulting in the piling up of inventories with builders and property developers, and may be followed by a sharp cut in prices by real estate companies to keep their inventories in check. Thus, buyers can hope for a continued decline in property prices in the near future at least.

The real estate segment is currently in a pause mode and the trend is likely to continue for a couple of months till the situation becomes clearer. Transactions involving land, commercial property or secondary deals may not happen for some time, with everyone busy sorting their finances.

Potential for Easing of Interest Rates

Another impact of demonetization has been the sharp inflow of funds into the banking system, which is expected to put downward pressure on the interest rate structure of the banks. Reduced dependence of banks on higher cost borrowings is likely to cut the MCLR or the Marginal Cost of Funds based Lending rate, followed by a cut in home loan interest rates. An easing of the monetary policy is also likely to have a favorable impact on the home loan interest rate scenario.

An easing of home loan interest rates is expected to result in more and more investors opting for real estate purchases over investment in bonds and fixed deposits, thus giving a fillip to the real estate segment. The move will also help builders and developers to reduce their inventories.

The government is also likely to boost housing loans in India to achieve its goal of providing houses to all by 2020. It may launch special housing schemes for first time buyers at attractive rates. However, the actual and final impact of demonetization will be visible only after several months, when the transition to the new currency is complete, the cash crunch situation is resolved and some kind of stability is achieved.

EMIs – understanding the math

EMIs are a big part of our home purchase decision. We explain how a percentage of your monthly income pays the home loan. 

If you are about to take a home loan, you are justifiably worried about the ‘EMI’ you have to pay the bank every month. The higher the EMI, the higher is the deduction from your monthly income till the loan is completely repaid. The EMI computation can also get slightly tricky, so it is best to understand how your bank calculates the numbers.

The EMI (Equated Monthly Instalment) is an amount of money calculated by the lending institution after taking certain factors into account. These factors include, and are a combination of, the principal amount (P), interest payable (I), and total number of instalments (N). The loan tenure is calculated on the basis of the number of years chosen but in terms of the number of months.

Do note the formula that your bank uses to compute the EMI:

[P x I x (1 + I) x N] ÷ (1 + I) x (N-1)

Now suppose you seek a home loan of Rs 40 lakh (P) at an interest rate of 12% (I) for a tenure of 10 years, i.e. 120 months (N). You may use the formula above to arrive at the EMI calculation. Or if you don’t want to be bogged down by the mathematics of it all, simply use your bank’s online home loan EMI calculator to arrive at the estimated EMI payable per month.

Points to note about the EMI calculations:

1. The EMI does not comprise equal parts principal amount and interest. In the initial years of the loan, the interest component is higher. It gets correspondingly lower as the loan progresses, while the principal amount is higher.
2. Thus, you cannot think that half of your loan is repaid after 5 years out of a total tenure of 10 years.
3. The EMI structure is liable to change during the repayment tenure, for three reasons:

• You may opt for a floating rate of interest, which can reset the interest periodically.
• You choose to pay differential or staggered EMIs, i.e. lower amounts for a few years and then larger EMIs later. This option is offered only by a few financial institutions in India.
• You repay incremental amounts in addition to the regular EMIs. The prepayment amounts reduce the principal amount of the loan and the interest is recalculated on the balance amount.

Premier banks and housing finance institutions offer an online home loan calculator that makes the EMI calculations easy. All you have to do is fill in the numbers as prompted for a close estimate of the EMI you will pay for your home loan.

Important Mortgage Tips for Home Buyers in 2016

According to an article published in The Economics Times on October 5, 2016, the Reserve Bank of India (RBI) has reduced the repo rate from 6.5% to 6.25%. The repo rate is the rate at which the RBI lends money to commercial banks, in case they run short of funds. It is believed that this action will promote a good borrowing environment in the country, especially for retail customers, which will ultimately increase the demand for personal and home mortgage loans.

Getting a home loan is not a bumpy ride anymore. Here are some tips that can get you the best deal for the most important investment of your lifetime.

10 Smart Mortgage Tips for Home Seekers

1. Work on Your Creditworthiness

Nothing works better than your creditworthiness when you are applying for a home loan. It is the valuation performed by certain agencies, considering factors like repayment history and credit score. If you're managing your current debt responsibly, paying your bills on time, etc., then you are most likey to be eligible to for the desired loan amount.

2. Always Save for the Down Payment

It is believed that paying 20% as down payment on a mortgage is ideal. The down payment will highly affect you and your family, so it is strongly advised to stay prepared.

3. Seek Advice from a Professional

It is not necessary to be an expert in homebuying, instead look for assistance from qualified professionals. They will answer all your questions about your financing needs too.

4. Look for the Best Mortgage Lender

Taking on a loan is much more than just getting a favourable interest rate. You should get the loan estimates from multiple lenders before reaching any decision.

5. Understand the Loan Types

A fixed-rate home loan doesn't suit every home buyer in the same way that an adjustable-rate mortgage isn't right for every home buyer either. An ideal situation is a 30-year loan, if you are buying the house to raise a family. If you are opting for a 10-year loan, an adjustable-rate mortgage is preferred, which is fixed for the first few years and then starts reducing for the rest of the tenure.

6. Consider Preapproval

It is recommended to have your funding preapproved even before you start looking for a house. After determining the amount of money that you are qualified to borrow, your house-hunting process will become much more realistic and fall within your budget.

7. Nest amongst Like-Minded People

Humans, being social animals, are highly affected by their surroundings. Interestingly, your house plays a key role in all aspects of your life. Consider the community, extracurricular activities and nearby facilities before narrowing down your search.

8. Don't Forget Your Budget

You have to take into account the additional burden of monthly expenses on other non-negotiable expenses, such as property taxes, insurance and other household expenses. Stick to a budget when finalizing a home mortgage loan.

9. Negotiate on Closing Costs

When you receive the loan estimate after applying for the mortgage, you'll get a rough idea about the closing costs or “cash to close”. Hence, shop for the best closing costs.

10. Strengthen your Saving Account

It is not wise to spend your savings on down payment or closing costs, ignoring emergencies. A golden rule is to save money worth 3 to 6 months of your living expenses beforehand.

Home loans – The answer to your house purchase question

If you are still on the fence about taking a home loan, we give you four reasons to tilt your decision in favour of taking one.

The never ending escalation of real estate costs in India has made it practically impossible for first time home buyers to buy a house. Every time you decide to take the plunge, interest rates increase or construction costs shoot skywards and raise the overall house costs. Ultimately, you realise that there is no way you can raise the capital to make a full payment on a house you like. So you continue living in rental accommodation, because you do not want to take a home loan.

This is why you should consider taking a home loan, if you want to make that all-important first home purchase.

1. Prices keep increasing! Most people feel that they can save money and take a lower loan amount to buy a house in the future. But real estate prices normally show an upward trend, unless there is a severe economic downturn. So even if you save money for a year, you will still be short of funds when prices rise and you try to buy a house. So take a home loan now, not later.
2. Your finances may change at a later date. Those who have a stable income at the moment can afford to take a home loan and repay it in a reasonable amount of time. It may become impossible to take a loan if you have to take a pay cut or if your spouse quits working to take care of your child. Your financial life will keep changing as the needs of your family change, so postponing the home loan decision for later might not be such a good idea.
3. Your eligibility changes as you age. Home loan insurance companies compute your home loan eligibility basis your current income, age and overall repayment capacity. Thus, the tenure of the home loan is higher if you are younger, to account for the number of working years you still have left. It is better to take a home loan at age 25 rather than do the same at age 35, because your loan tenure will automatically be reduced by about 10 years. You can use a home loan eligibility calculator to find out how much loan amount you can get basis your income and age.
4. You can always sell at a later date. There is every chance that the house you can afford to buy today may not suit your needs tomorrow. Since property is quite liquid in nature, you can sell the house you bought today to buy a bigger one in the future.

Only a home loan from a reputed financial institution can help you buy your dream home. So why wait to make your dream come true?

Tip of the day: How to buy your dream home sooner rather than later

Buying your own home is now easy and hassle-free with the best loan product making the purchase possible.

In the hurly-burly of life, we strive for a semblance of security and comfort for ourselves and our loved ones. All we expect is that at the end of the day, we may have a place to call our own and our family members with us till the end of time. This entails owning a home that we can craft with love and ingenuity.

But in India, many people today are forced to make their peace with rental accommodation. Real estate prices have spiralled out of control in recent years, so most people are unable to take the plunge and buy their own homes. The home purchase dream remains a dream for years: but you can bring it to reality with a home loan.

If you are sceptical about taking a home loan, don’t be. It is the best way to finance your dream home purchase, in which you must raise only a small percentage of the overall home value from your own resources. Besides, a bevy of premier housing finance companies in India have several home loan products to suit your needs. So whether it is a first home purchase or a home renovation loan, you will always find a product that suits you.

Choose the most reputed housing finance institutions for the home loan – they simplify the process and reduce application processing times so that the loan amount is disbursed quicker. They also follow a stringent background check on each applicant’s credentials as well as inspect the property/land you wish to buy so that there are no legal lacunae to be faced at a later date. 

Meanwhile, you can get up to 80% of the property value as the home loan, or even higher, depending on the housing finance institution.

The best news is that many financial applications now have an online home loan option, which cuts both time and processing charges for the applicant. You can apply for both pre-approval and online home loan, attach the approved list of documents (self-attested) and pay the fees via credit/debit card or Internet banking. Once the documents are verified and the property is inspected via on-site inspection, the loan application is processed further. 

Within days, you get the loan approval and the amount you seek is disbursed to you. It’s so quick and easy – and it gets you the dream home you always wanted.

What is the difference between term and life insurance?

Though both are life insurance products, there are some significant departures between term and life insurance policies. Let’s take a look at these differences.

The main purpose of any person’s existence is to create a stable life for himself and his loved ones. To this end, he gets an education, a good job and tries to grow his wealth by picking up extra shifts at work and making timely investments. For any responsible family person, his loved one’s comforts and the realisation of their dreams are the biggest priorities and to this end, he works hard all day to create a peaceful and worry-free life.

A major step in this direction is also taken with life insurance. Taking insurance helps protect our loved ones from future financial setbacks in our absence. However, those taking insurance are often faced with the prospect of taking term insurance over whole life insurance policies. This decision is influenced partly by the affordable premiums entailed in term insurance, as also the higher sum assured. But life insurance policies also have their own benefits – so which one should you choose?

We help you decide. Take a look at this chart below:

Parameter	Term insurance	Whole life insurance
Tenure of the insurance policy	A fixed term of time (say 10, 15, 20 years)	Valid for life time of the policy holder
Benefits offered	Death benefit only	Maturity benefits
Returns	No returns offered	Low returns offered
Affordability of the plan	Very affordable, with low premium payments	Expensive, with high premium payments
Good investment?	Not an investment policy	Yes, especially when timed with major life events
Market-linked?	No	Yes, especially with ULIPs
Bonus potential	NIL	Good, especially with claim-free policies
Tax benefits?	The premiums are not taxed	Premiums may be taxed
Surrender value	NIL. Policy is terminated when premiums are not paid	There may be a surrender value based on when the policy is surrendered
Revision option	NIL	Yes

Does this explain the essential differences between term insurance and whole life insurance? We hope the above comparison helps you decide whether you need to take term insurance or whole life insurance. Whatever you decide, it is a step in the right direction – after all, isn’t it your job to protect your loved ones, even in your absence?

Equity funds: The right path to a safe financial future

Equity funds are varied and reliable investment options for the investor who is confident about his financial goals and how to achieve them.

If making investments was easy, everybody would be an investor! However, the investment universe is not as unfriendly or mysterious as an inexperienced person would assume it to be. When dealt with intelligently and with an eye on market trends, an investor can actually realise his financial goals beyond his wildest expectations.

But choosing the right investment instrument is important. Many investors look to invest in shares and equities, and this is a sensible choice. Investing such that the portfolio is a mix of shares of large and small companies in both established and new sectors of business can help create diversity and get excellent returns over the long run. In this context, it is important to mention that investing in equity funds can get investors good returns safely and reliably.

Though no market-linked investments are devoid of risk, diversified equity funds provide long term capital growth by investing in the highest performing sectors and industries. Thus, long term capital growth is assured by capitalising on key moments in the market cycle. Often, the best equity funds invest in the markets without bias but with a keen eye on established and lucrative industries, as also upcoming sectors that are likely to see a major boom.

Thus, equity funds provide ample opportunity for investors to create wealth over a long period of time. It also helps the investor hold on to a large bouquet of securities for the future.

If you are a novice investor that is unsure or unable to read the market trends correctly, you can enlist the help of a fund manager who can advise you on building your portfolio. The fund manager will invest your money on your behalf and track the fund’s progress to ensure that your investment goals are met.

There are excellent options in equity funds in the country today. While making your choice, it is prudent to go with a fund that invests in IPOs and emerging sectors that have the potential for future growth. Also, it is possible to purchase equity funds online and track the fund NAV on a daily basis. Besides this, your fund manager can monitor the markets’ daily working and appraise you about your fund’s performance regularly. If you are about to invest in the markets this year, you can choose frontline equity funds and diversified equity funds for the best returns.