Saturday, December 27, 2008


Everyone desires to have a dream house for the family to live happily always. Some manage to build house, some do buy outright. But a few may not be able to construct
A house in his prime time for non availability of funds. Till twenty years back it was not easy to arrange home finance. In the event a few bank agreed to finance, there were lots of formalities .The quantum of loan was not enough too. With the liberalization policy initiated by Dr. Man Mohan Singh and later continued by the subsequent Governments it became possible for young people to have their dream house early in their career.

In 2004 the interest rate, for a housing loan of Rs. Thirty lakh given for twenty years, was 7.75%.Slowly the rate kept on increasing and in 2008 once interest rate reached a high of 12.75% percent. It was almost impossible for the middle class people to take loan at this rate. For taking loan of thirty lakh for twenty years the returnable interest components stood at Rs. 68 lakh. When the loan was initially taken by the person in 2004 his interest component was Rs. 29 lakh only. This amount was reasonable for him to return over twenty years without any difficulties. As the interest kept on increasing it become impossible for him to meet both ends met. As a middle class salaried person his income did not increase leaps and bound in last four years. The inflation however kept on increasing from 3% to 12% there by bringing down the real income. He with his limited income needs to take care of his children’s education, marriage of daughter even if he agrees to forget about the luxuries of life. Some of the middle class persons were in his wits end. They were in tremendous tension, thinking as to how to manage the finance for the dream house,( when interest component became Rs 60 lakh) which their family so dearly cherished. Fortunately the month of December 2008 saw a relief in sight. The most of the nationalised bank reduced the housing loan to 10.50% (above Rs. twenty lakh) for twenty years. In case loan is required only for five years then rate is much lower (8.5%). With the reduction of rate it would be now possible for middle class to approach banks for fiancĂ© to build their own home. The home loan finance now is 9.25%( up to 20 lakh) & it may get further reduced in future. Interest can be frozon for five years.

Before taking a loan it should be assessed whether with available finance he would be able to pay instalments regularly. The EMI could be reduced if larger initial payment be made. So, person who wants to own a house must start saving from the beginning of his career. During youth a person has less responsibility. He can invest in diversified Mutual funds for five years. The amount would come handy to pay for initial payments. The building of house could be taken up only after ensuring flow of regular income. As far as practicable the loan, to be taken for the dream house, should be divided between both husband and wife (if she also earns), to avail income tax benefit by both. The total cost would come down. In case the family has also a working child the loan should be taken in the name of all three persons so that income tax benefits could be availed by all three of them. Before taking a loan consult your income tax advisor. He would be able to give you proper guidance on quantum of loan and income tax benefit. Another important point is to be noted that every time interest rate goes up by 0.25% percent points the repayment period gets longer and total payment gets multiplied.. Fortunately the interest rate is expected to go down further after some time. So when you opt for mode of interest payment do not opt for fixed rate now. In case interest rate go down to 7.75% or even 8% it would be prudent to opt for fixed rate. New home loan takers can wait for some more time for better bargain. There is a possibility to get home in lower price in the New Year for raw material cost like cement and steel are coming down further. The existing person who have entered contract already may request for discount as the cost of construction is coming down. Hope, the New Year would usher in a better deal for acquiring a dream house.

1 comment:

I me myself said...

Hello, I am myself in a financial services company (for the past two years) but I become all very confused when it comes to personal investing (& tax saving), precisely because I never properly 'really' understood the options available to a common person. I understand investing, in a 'broader' sense but am not sure about the exact choices I need to make....

Therefore, I loved your blog for its overall coverage of issues - from youngsters, to senior citizens, to planning for a home, or instilling financial sense in your kids.... Kudos. All the Best. Keep up the good work!