Investment in real estate is most profitable | Magicbricks.com Property Pulse

Investment in real estate is most profitable | Magicbricks.com Property Pulse

The demand for housing has propelled, thanks to easy home loan options available to young professionals. These professionals with hefty pay packages want to invest in the housing sector by availing a loan in order to get income tax benefits.

In this context, a home loan becomes a significant propeller of the real estate market. For the past decade or so, a home loan acts as a growth engine for the property market. A real estate investment normally appreciates about 4% or 5% in a year.

By availing a home loan with a margin money of 20%, the rate of return on investment is about 25%, even though the annual rate of return is only 5%. Even after factoring for interest costs and property taxes, the rate of return on real estate investment is highly attractive because of the income tax benefits associated with home loans.

The year ahead will throw open varied home loan options. With the Reserve Bank of India (RBI) coming out with certain restrictions/conditions in the home loan market, the customer, hitherto pampered by banks for the past decade, will be facing a different scenario.

The RBI has been vocal about teaser loans offered by almost all banks/ housing finance companies over the last couple of years. As these institutions offer competitive rates during the initial period of the loan term, the demand for loans has gone up while the economy witnessed a downturn. These loans are risky from the view point of financial institutions as the customers is made to pay higher EMIs from the third year onwards.

The RBI has again categorically requested banks to lend only upto 80% of the value (Loan to Value - LTV) as against the earlier norm of 85% LTV.

A higher margin requirement in this way would definitely put pressure on young professionals with two to five years of work experience, since they need to build more resources to buy a house.

Ever since the global economic setback in 2008, banks/housing finance companies expect their NRI customers to have a sufficient cash balance before approaching them for a loan. A general practice by NRIs over the last seven to eight years, when the economic conditions were normal, was to approach banks/financial institutions for home loans to buy property in their home town, based on their monthly salary alone. But now these lending institutions expect them to shore up more funds other than their margin requirement for buying the property, as the lenders are not sure of their future, career prospects abroad.

Young NRIs with just about three to five years of work experience abroad may find it difficult to avail of home loans in the present scenario, as in most cases, they have only enough savings to fund for actual margin requirements. In the coming years the lending institutions may increase the margin money requirements and may have a different set of rules for NRIs. It may even be possible to lend them only about 60 to 70% of the property cost, as against 80% for resident Indian customers.

Many customers overstretch themselves while buying a property by going for the maximum quantum of the loan. Investors should build up sufficient resources by way of savings before going for a home loan.

It is generally seen over the years that the increase in the home loan interest rate is a cause for concern to the customers, as most of them avail of 85% to 90%of the cost as a loan. If they develop the tendency of availing a loan of 70%-75% of the cost as loan, then the increase in home loan rates, as seen in the recent past will not affect the borrowers much.

Low loan to cost ratio (LCR or LTV) helps the customer in solving the interest rate risk. In the inflationary economy, home loan interest rates are likely to go up in the short to medium term category.

Availing loans from banks/Housing Finance Companies with transparent rules coupled with attractive pre-payment options will be the best option. Customers in such cases can easily prepay the loan whenever there is a rate increase.

Investing in real estate by taking home loans is the best form of investment even with all these likely conditionalites.