Buying a Home on loan just got difficult

Feb 15th, 20122 Comments

If you are a salaried individual, buying a house or flat of your own has become really difficult. The main reasons are the high property prices, and the high interest rates for home loans.

But now, there is another factor that is going to make home purchase even more difficult for you.

How much loan do you get?

When you approach a bank or financial institution for a home loan, they give 80% of the cost of the house as a loan to you (for homes costing more than Rs. 20 Laks), and you have to provide 20% of the amount from your own pocket as the down payment. (This 80% is also called the “loan to value ratio”).

And what is the amount that is considered as the cost of the house? Here’s the list:

  • The amount paid for the house as mentioned in the sales deed
  • Stamp duty paid for the purchase
  • Registration fee paid for the registration of the documents
  • Any government taxes paid on the transaction, like the Value Added Tax (VAT) and Service Tax

This will change in the coming days.

New Rule of RBI

The new rule set by RBI will reduce the amount of home loan you will get from banks.

The “loan to value ratio” remains the same which means you will still get 80% of the cost of the house as loan. But RBI has changes the definition of the cost of the house.

Only the following would be considered as the cost of the house going forward:

  • The amount paid for the house as mentioned in the sales deed

Following things would not be considered as cost of house from now.

  • Stamp duty paid for the purchase
  • Registration fee paid for the registration of the documents
  • Any government taxes paid on the transaction, like the Value Added Tax (VAT) and Service Tax

What does is mean for you?

Depending on where you are buying the house and the rates of various taxes applicable there, you would effectively get only 70% – 75% of your expenses as a home loan.

So although on paper, you still need to pay only 20% as the down payment, you would be paying anywhere between 20% – 25% if you add stamp duty, registration and other levies.

Since the cost of a house or flat runs into tens of lakhs of rupees, this would have a significant impact on your ability to buy a house of your own.

Example

Let’s say you want to buy a flat in Mumbai.

  • Sales agreement: Rs. 40 Lakhs
  • Stamp duty (5%), registration, value added tax (1%) and service tax (2.6%): Approximately 9% or Rs. 3.60 Lakhs
  • Your total expense: Rs. 43.60 Lakhs

Situation till now

So far, you got 80% of the total expense. So,

  • Home loan amount: Rs. 34.88 Lakhs
  • Your out of pocket expense: Rs. 8.72 Lakhs

Situation going forward

From now on, you would get a home loan for 80% of the sales deed amount. Therefore,

  • Home loan amount: Rs. 32.00 Lakhs
  • Your out of pocket expense: Rs. 11.60 Lakhs

Conclusion

As you can clearly see from the example, this change would mean that you would need to save up much more before you can buy your own house now.

So be prepared to wait a little longer you dream home.

2 Responses to “Buying a Home on loan just got difficult”

  1. Jai Gharge says:

    Good article and examples given.

  2. Trupti says:

    hey…thanks for the valuable information…….good work :)

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