LOANER THE GAINER: A case study of two next-door neighbours at a housing complex in Ghaziabad, the Mehtas and the Upadhyays, proves why buying a house now makes more sense.
The Loan payer: Ravi Mehta, 39, IT professional
Through my home loan repayment, I am actually building up an asset.
SALARY EMI* % OF SALARY Present 5 yrs later 10 yrs later 15 yrs later 25,000 40,262 64,843 1,04,431 7,500 7,500 7,500 Nil 30 18.6 11.56 Nil Paid Rs 13.5 lakh in 15 years and owns a house *Monthly repayment of Rs 6 lakh loan for 15 years The Rent giver: Rajiv Upadhyay, 32, Company executive I realise that I should have my own home, however small it may be. SALARY RENT PAID % OF SALARY Present 5 yrs later 10 yrs later 15 yrs later 16,000 25,768 41,499 66,835 2,600 4,187 6,743 10,860 16 16 16 16 Paid Rs 9.91 lakh in 15 years and yet doesn’t own a house Assuming that salaries and rentals rise at 10 per cent annually and Upadhyay does not buy a house in 15 years.

The house is in a mess. Woodwork, painting, polish, bathroom fittings … Girish Singla, an executive with a logistics firm, is getting used to the din and the clutter in his house. Ever since December 2001 when he moved to his new three-bedroom duplex flat in Noida, his life has been a whirlwind. Transfer of title, paper work, telephone connection—the list is unending. But ask him how he feels and he says, “Life has never been so peaceful.”

Sick of changing houses—five times in 10 years—interfering landlords and rising rents, Singla has just discovered the warmth of “home sweet home”. Of course it came at a hefty Rs 14 lakh for which he had to take a Rs 10 lakh loan. But it was a debt worth its while. As a tenant Singla was paying Rs 10,000 as rent and Rs 4,800 as income tax every month. Now he is paying an equated monthly instalment (EMI) of Rs 12,896 on his housing loan and no income tax because of the tax benefits his loan brings.

Singla bought his house at the age of 32. His father did not own a house till the time he retired. Singla is typical of the growing number of middle-class people opting to buy a house early in their careers. And why not: interest rates continue to fall, property prices remain stagnant and home loans are increasingly hassle-free. According to hdfc estimates, the cost of buying a house in India today is about 3.5 times a person’s annual income as against 10-15 times a decade ago. For hudco, the average age of loan seekers was 35 years in 1999. Today it has dropped to 30 years.

This is the best time to buy homes. Income levels are up, property prices are down. Keki Mistry, MD, HDFC

The going is good

> Interest rates down from 16 per cent in 1997 to 11.5 per cent in 2002. A further cut is expected. > HFCs now offer loans on variable interest rates and allow individuals pay more as they earn more. >Tax rebate on interest up from Rs 30,000 in 1999 to Rs 1.5 lakh. > Process fee down from 2 per cent of loan amount to nil in some cases.

And will get better

> Minimum down payment may be reduced from 15 per cent to 5 per cent of the purchase price. > With NHB bearing default risk, loan sanctioning to get easier. > Income-tax approvals in a property sale may not be required. > Salary certificate or Form 16 A may no longer be mandatory. n A 25-year-term loan will be launched soon.

Interest rate on housing loan has been falling for three years now, but more important are the better tax rebates and the likelihood of a further fall in interest rates—both triggered by Budget 2002.

In 1997, home loans were available at a high interest rate of 16 per cent. A Rs 1 lakh loan for 15 years carried an emi of Rs 1,495. Today interest rates have slumped to an average of 11.5 per cent and the emi works out to Rs 1,168 for the same loan. In 1999, deduction of interest paid on loan from taxable income stood at Rs 30,000. Now the deduction limit has gone up to Rs 1.5 lakh.

“With diminishing returns on small savings, buying a house has become an attractive investment,” says V. Suresh, managing director, hudco. Factoring in the tax benefits, the interest rate on home loans today actually works out to around 8.25 per cent. “This is the best time to buy homes. The income levels are going up. Property prices are down and stable at those levels. The interest rates have come down further and may soften even more,” says Keki Mistry, managing director, hdfc, which has 60 per cent share of the housing loan market.

Procedural ease has kept pace with the fall in interest rates. Five years ago taking a loan meant at least three weeks of processing and a lot of paper work. Now, the processing takes a week and most of the paper work can be done at home. Things are likely to get even better. National Housing Bank (nhb) plans to offer mortgage finance to housing finance companies (hfcs). This means default risk on home loans will be borne by nhb not the hfcs and the loan processing will become simpler.

With returns on small savings diminishing, buying a house is an attractive investment. V. Suresh, MD, HUDCO

As nhb will bear the default risk, requirements like salary proof and income-tax returns—which kept many self-employed professionals away from home loans—will be done away with. Instead of providing the loan for only 85 per cent of the purchase price, hfc loans may soon cover up to 95 per cent of the costs. This will lower the entry barrier for house loans significantly.

hfcs and banks have their own reason to promote housing loans aggressively. With the economy in a prolonged downturn, corporate lending has slumped, making home loans a sound bet. In 2000-1, 44 hfcs disbursed Rs 26,300 crore for 28 lakh houses. The disbursal is estimated to top Rs 35,000 crore (a 35 per cent hike) in 2002-3. Says Mistry: “The October-December 2001 quarter has seen us growing by a record 52 per cent in approvals and 55 per cent in disbursals. This may be the highest ever rise in home loans if you take away the initial years when we grew on a very small base.” That makes housing the only booming sector in a sluggish economy.

There are more goodies in the offing. The mandatory approval from an income-tax official for property transaction is being abolished. This will ease second-hand sales. Money received from the sale of property can now be invested in capital gains bond of nhb, providing people an avenue to park the property sales proceeds without paying hefty taxes. “With all this, we expect the emi to drop to three digits,” claims Suresh.

lready a large number of people have begun purchasing houses for self-use rather than as investment. “This means less speculation and lesser price appreciation in the property prices,” says Anshuman Magazine, managing director, Richard Ellis. The message is clear: it’s time to stop paying rents and start repaying house loans.

—with Vivek Law