CHECK HISTORY OF SAFEGUARD FEATURE

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The Initial steps towards property purchase are the scrutiny of title deeds of the property, and this is the first and foremost exercise the purchaser’s advocate has to undertake before entering into an agreement with the seller.

A clean and marketable title, free from all doubts and encumbrances vested with physical possession, is very important. The ownership of the titleholder can be traced from the title deeds and revenue records.

It is the duty and responsibility of the purchaser’s advocate to safeguard the interest of his client.The advocate shall thoroughly scrutinize the marketable title of the property and genuineness of the documents. The advocate should also amount of risk involved in the transaction and guide them on the mode of payment to be adopted.

Origin of the Property:

The origin of the property is very important to trace the title of the property. It is otherwise called “Root of Title”. It is the safest way to determine the origin of the property and trace its marketable title. Documents covering a minimum period of 43 years of Adverse Possession against individuals or Conflicting Claims against individuals, documents covering a minimum period of 30 years must be checked. If a person is enjoying the property for more than 30 years, he will get title by adverse interest against the government as per the Limitation Act. Also as per Section 90 of the Indian Evidence Act 1872, a document executed 30 years fore is presumed to be valid.

Subsequent Transferors:

After ascertaining the origin of the property, it should be followed up by methodical examination of events and further transaction, if any, in an uninterrupted and sequential manner, involving the previous owners and the present owner of the property.Here, the purchaser’s advocate has to very carefully look into all aspects from various legal angles as to how the property was transferred from the previous owners to the present owner.

Such a transfer may be by possession, inheritance, settlement, will, sale, mortgage, release, gift etc.,involving such intermediate parties. For supporting such a transaction, the advocate has to carefully examine the title deeds and other supporting documents like revenue documents and other records. Also verification of identities of the names of parties and their family connection, wherever they are relevant, and proceeding if any, involving the parties before any Court of Law,other legal forums and authorities including revenue authorities, must be done.

Statutory Clearance:

The nature of various statutory clearances obtained from the relevant authorities like revenue, land reforms, income tax, etc., equipped for completing the transaction must be informed to the parties. In case of purchase of agricultural land, various clearances must be obtained before executing the Deed of Conveyance.

Present Status:

The “Present status” of the property is the most important point to be examined.The advocate has to fined out who is the present owner, origin of the property, what title deeds and supporting documents he is holding, is it his ancestral property or self acquired property and who are his legal heirs, if the legal heirs are majors in age, the vendor must ensure their presence while executing the Deed of Conveyance.If they are minors in age, the vendor has to get the permission from the court before executing the Deed of Conveyance. In somecases the vendor may conceal the fact of legal heirs. To find out the truth, the advocate must ask the vendor to produce either the succession certificate or the family genealogical tree issued by the revenue authority. If necessary he must see the family ration card for further clarification.

The advocate must find out in whose name the Khata stands, whether the khathedar possesses up-to-date tax paid receipt in his name and up-to-date Encumbrance Certificate to establish his right, title and interest in the property. The advocate has to check the Encumbrance Certificate covering a relevant period, generally above 12 years upto 43 years from which it would be known what kind of charge has been created on the property and whether such an encumbrance is subsisting or not. Municipal and other revenue authorities too maintain records as to who is in possession of the property, what is the amount of tax payable on the property and upto what period tax has been paid. All this can be learnt from these records.“Present Status” is an important factor to establish property’s present ownership.

Genuineness of documents:

After thoroughly scrutinizing the documents, the purchaser or his advocate has to check up all documents for legality with the concerned departments just to ensure that the documents are genuine; that they originated from the departments and that they are not fake ones. In addition the advocate has to find out from the department whether there is any attestation, notification or proceedings against the present owner. In case of buildings it must be ensured that it has not been served with a demolition notice.

Identity of the property:

The identity of the property must be checked on the spot. Measurements mentioned in the documents must tally with actual physical measurement of the land available on the property.It must also be ensured that there is no encroachment on the property. In case of encroachment, the measurement of the available land must be recorded and this must be mentioned in the Deed of Conveyance. The boundaries in the schedule surrounding the property must be checked physically. Also, the purchaser may make enquiries tactfully with the adjacent property owners about the ownership of the property he is proposing to buy.

Paper Notification:

Though paper notification is optional, it is always advisable to notify in a leading local newspaper about the buyer’s intention to purchase the property. This is done to safeguard the interest of the purchaser. Even after examining the various documents, the Advocate may not be able to find out whether the property is truly free from any claim or not. A paper notification will beget response from a genuine claimant. Therefore, paper notification is the best way to avoid legal problems for the purchaser at a later date.

Physical Possession:

In case of a vacant site, the purchaser may, with the permission of the vendor fence the property with barbed wire or he may construct a compound wall and put a signboard, if necessary, to intimate the ownership of the property.Verification of title is very important. It is not merely tracing the title on the record but also examination of the genuineness of the records, identification of the property, notification in a newspaper and physical possession of the title of the property.

Even after entering into an “Agreement to Sell”, the purchaser continues to make enquiries about the title. A doubtful title cannot be forced upon the purchaser. Purchaser is not bound to complete the sale if there are defects in the property, material or latent, which are not discernible in ordinary course. A mere suspicion of fraud that cannot be made out will not make the title doubtful and the purchaser cannot reject the title.

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BURDEN ON FLAT PURCHASERS

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Blow to Construction of residential Sector:

Unfortunately the union budget has treated the construction sector badly. The union budget has included the some additional services in the service tax net; like site formation, demolition, and like services of survey of land and making maps, construction of planned residential completes with more than 12 dwelling units developed by the builder. The service tax is 10% with 2% education cess. Thus the effective tax would be 10.20%.

Not a Burden to Builder:

The service tax will be collected by the service provider, that is builder. But he will pass on the tax component to the purchaser of residential units, thus it is the end user who will ultimately suffers.

Apart from passing the service tax component to the purchaser, the builder enjoys certain tax exemptions on full profits earned in developing and building housing projects under section 80-IB of Income Tax Act. The exemptions are allowed subject to certain conditions, such as

1. The project should have a plot area of minimum one acre.
2. Residential unit should have maximum built up area of 1000 sft in Delhi, Mumbai and 1500 sqft in other areas.
3. The built up area for commercial and shopping should not exceed 5% or 2000 sqft whichever is less.
4. The project should have approved before 31 March 2007 and should be completed within four years from the end of the financial year in which project was approved.

Further minimum plot area requirement of one acre is waived in case of housing projects carried out in accordance with the schemes framed by central or state governments for reconstruction of or redevelopment of existing buildings and notified by the board in this behalf for redevelopment of such dwellings. The exemption is allowed for five years on 100% profits. Thus on compliance of certain conditions builder need not pay any income tax on the profits earned on construction of dwelling units; and passes on the service tax to the purchasers. So levy of service tax on flats is not a burden to the builder who coolly pockets the profits, which are exempted from income tax.

Purchaser will suffer:

The ultimate man who has to bear all the load is the end user, who at most times might have spent all his life time earnings to have a roof over his head. Not only the service tax, but other decisions of government has exposed the purchaser to higher expenditure.

The Cabinet Committee on Economic Affairs has recently decided to allow 100% foreign direct investment in construction sector; where the minimum area to be developed is 25 acres (10 hectares) in case of serviced housing plots. Already owing to various restrictions on approval of layouts, prohibition on betterment charges in the city/town municipal areas the price of lands have increased by 50% in the last six months around the city. With allowance of 100% FDI in construction sector, the price of the land will further increase around Bangalore.

25% Duties:

In certain cases old structures have to be demolished.The lands have to be surveyed and mapped.The builder starts construction of multi-storied apartment after approval of plan. Many times each of the above activities are done by different agencies and each activity attracts services tax of 10% and education cess of 2%.The budget has proposed to exempt service providers whose gross annual turnover does not exceed 4 lakhs, but this exemption is a pittance for construction sector.

Seldom a builder/promoter prefers to construct less than 12 dwelling units. With increase in land price and levy of service tax on construction and related activities, the cost of dwelling units will increase making it not easily affordable by end users. Apart from actual purchaser price of the flat, the purchaser has to bear 10% towards Stamp Duty and Registration Charges, 4% towards sales tax, and 10.20% towards service tax and expenditure towards Katha, tax assessment etc,thus purchaser has to pay nearly 25% of purchase price towards various taxes, duties and levies.May the middle class may have to forget about owning a flat and settle for a small houses like sardine packs, without any proper facility.

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TIPS FOR PURCHASERS OF IMMOVABLE PROPERTY

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1.Invest your hard earned money in projects promoted by renowned developers having proven track record. Do not go by glossy brochures or attractive advertisements. Do not believe the words, ‘Financial Institutions approved Projects’.

2. Check up the documents with a learned Advocate. Ensure that the documents of title of the property you intend to purchase are clear.  Defective title will create problems at any point of time.

3.   Always go for a property, which has a resale value.

4.   Ensure that the building has been constructed as per the sanctioned plan and any deviation is within the allowed percentage and it is not in a low-lying area or in a filled up water body.

5.   You may always rope in the services of a reputed real estate agent and fix his commission well in advance.

6. Purchase the property in a developing area. The value of land will appreciate.

7. If you prefer a ready-to-occupy Flat, locate it off the main road on a wide street with adequate water supply away from slums, cinema hall, marriage hall, open drain, factories, place of worship but not very far from school, college, commercial complex, temple and hospital.

8. If you buy the Flat/Building underconstruction, visit the work site regularly and see the work progress.

9.  You may not be a Vaastu believer, but purchase House or Flat or land that is Vaastu-friendly from resale point of view.

10. If any body offers flats/sites for a cheaper rate than the prevailing market rate, there may be certain hidden problems. So you should be extra-ordinarily careful on finalisation of such a property.         

11. Ensure that the developer has Clearance Certificates from government departments, viz., Electricity Board, Water and Sewage Board, etc..

12. Commencement Certificate and Occupancy Certificate are other very important documents that are necessary while buying the flats.

13. Check up the genuineness of the documents with the concerned authorities in person.

14.  Ensure Agreement for Sale and Sale Deed, duly stamped, executed and registered are in your possession. Both should contain fair clauses for both the parties.

15. Incase of flat purchase, specification of the building, including material used, difference between the carpet area and the super built-up area are the important factors to decide the rate.  Other facilities like Club House, Swimming Pool etc., also will have to be considered.

16. Check whether there is adequate water supply and sanitary line facility.

17. In case of GPA transaction ensure the validity of GPA

Documents Required:

The Documents required for scrutiny of the Title will vary in each case. In general the following documents are required to verify the title deeds of the property. However, based on these documents, further documents will also be required to come to conclusion.

Documents required for purchase of BDA property (formerly CITB):

1. Allotment Letter.

2. Receipts against payment of site value.

3. Lease-cum-Sale Agreement.

4. Possession Certificate.

5. Absolute Sale Deed

6. Khatha certificate from the BDA

7.Tax paid receipts from the Bangalore Development Authority.

8.Khatha Certificate from the Bangalore Mahanagara Palike(if it comes under Corporation Revenue Jurisdiction.

9. Tax paid receipts from the Bangalore Mahanagara Palike.

10.Encumbrance Certificate from the date of allotment to the date of possession.

11.Re-allotment Letter / re-conveyance Deed if property re-conveyed by the BDA.

12.Documents to prove why BDA re-conveyed the property.

Documents required for purchase of Converted Revenue Lands:

1.Conversion Order issued by the Dy. Commissioner.

2.Conversion amount paid Receipt.

3.RTCs for 30 years issued by the Village Accountant

4.Tax Paid Receipts issued by the Village Accountant

5.Documents of ownership

6.Mutation Register Extracts

7.Agarband/Tippani/Podi Extracts

8.Surveys/Boundary Map

9.Village Map

10.Nil Tenancy Certificate

11.Confirmation from the competent authority that there is no acquisition proceedings.

12.Layout Plan Approval by the competent authority.

13.Khatha Certificate issued by the Revenue authority.

14.Latest Tax Paid Receipts

15.Encumbrances for the last 30 years

16.Validity of the Power of Attorney

17.Zonal Regulation Map.

Documents required for purchase of Agricultural Land

1.Origin of the Property

2.Flow of Title

3.Mother / Parental Deeds

4.Index of Land and Records of Rights

5.Grant Certificat e if any / Saaguvali chit

6.RTC/Phani extracts for the last 30 years

7.Relevant Mutations / Extract

8.Endorsement from competent Authority confirming that there is no acquisition proceedings.

9.Village Map

10.Survey map

11.Agarband, Tippani, Poddi Extracts

12.Relevant Sale Deeds.

13.C.D.P. Plan pertaining to the area.

14.79 (A) & (B)  Certificate under Land Reforms Act.

15.Land Tribunal Order, if any.

16.Certificate for change of survey number, if any

17.Nil Tenancy Certificate

18.Latest Tax Paid receipts.

19.Encumbrance Certificate for last 30 years.

20.Family Tree of the Vendor

21.Endorsement from Tahsildar that the land does not fall under       “Grant” or “Inam” category.

22.Phani of the Purchaser

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PROCEDURE TO MAKE CHANGES IN PROPERTY DOCUMENTS

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The documents are records of various transactions; it contain certain terms, conditions, consideration amount, names of the parties to the transactions, date of the transaction, the clear and complete description of subject of transaction, so that it can be easily identified.For example sale deed of a property contains the origin, flow of the title, and present status the names of seller and purchaser, consideration amount, easement, and brief description of the property with measurements, constructions, boundaries. They are permanent records, which are relied on for generations. Such documents must be legible clear, readable free of errors and should not create any doubts; disputes. They reflect the terms of transaction for which both the parties have freely consented.

It is always advisable to prepare draft copies of the documents for verification by both the parties, in case of agreements and understandings.  However the sale deed should be in favour of purchaser.  Hence the vendor receives the consideration.  He has to safe guard the purchaser in trust on the property to be purchased. Any additions, deletions, alterations in the draft copies should be discussed by both the parties and another draft copy as agreed by both the parties.

This second draft copy has to be vetted by legal advisers to ensure that it complies with legal, statutory requirements, there after only final deeds have to be prepared. As for as possible, additions, alterations, cancellations should be avoided.

Additions, Cancellations:

But at times, some additions,alterations, cancellations are inevitable, which are discovered at the time of executions.Any such alterations, cancellations, additions have to be done before presenting the document for registration.All such modifications should be authenticated by full signature of all the parties to the documents.But signature of witness is not necessary for such modifications. Only full signatures and not initials or short signature should be insisted. For cancellations, the original words should be neatly struck off it should be signed by parties to the document.

Erasing fluid should not be used.Registering authority records such additions, alterations, cancellations page wise on the document itself. This validates the additions, alterations, cancellation etc. Any modifications  done after registration is not valid and does not form a part of the document.More over document itself becomes invalid.The copies of the registered documents are maintained at registering offices and certified copies issued by such authorities also record on certified copies the number of cancellations, additions and alterations done before registration.They do not contain anything added deleted, modified after registration. So proper care should be taken so that all modifications are done before registration under the full signatures of all the parties to the transactions. If anything has to be changed after registration a separate rectification deed has to be executed.

Filling up blanks:

Some documents may have blanks as the required information will be available only at the time of execution.  Often date of executions is left blank, until the date is finalised.  The details of demand drafts, cheques like number, name of Bank, Branch are also left blank.  All such blanks have to be filled up before presenting the document for registration; and should be authenticated by all the parties to the document or executor by full signatures.

Attestation:

Attestation means, witnessing the documents.  Certain documents like will, agreements to sale, sale deed require attestation.  The execution of the documents should be witnessed by two persons, who are majors, and of sound mind.  Both the witnesses should affix their full signatures and should furnish their addresses.The attestation is not necessary in case of certain documents.

Thumb Impression:

There are many people who cannot sign. The thumb impressions of such people are taken for execution of documents instead of signatures left hand thumb impressions (LTM) in case of males and Right Thumb Impressions (RTM) in case of females have to be obtained on documents for execution. The brief description “LTM or RTM of ---------------- has to be written immediately below the thumb impression. As the persons who affix thumb impressions are illiterate, who cannot read or write, the entire contents of the documents should be read over and explained to them and a separate note to that effect has to be annexed to the document preferably signed by an advocate.

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FORMALITIES TO BE COMPLETED AFTER PURCHASE OF PROPERTY

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Ownership over the immovable property will not be conferred by mere execution of the sale deed in favour of the purchaser. There are many other formalities required to be completed after the purchase. Such post registration formalities, subsequent to the registration of the sale deed has been discussed below:

1. Obtain original documents of title from the seller in order to compare and confirm the same with the copies and the same has to be scrutinized by the purchaser's Advocate. After thorough scrutiny by the advocate and if further original documents are necessary, it is advisable to ensure the production of such documents in originals only. If you are availing housing finance, then you have to apply for the certified copy of your sale deed in the concerned jurisdictional Sub-Registrar Office.

2. Apply for the latest and updated encumbrance certificate in the concerned Sub-Registrar Office. It is also important to verify whether such Encumbrance certificate reflects the execution of sale deed in favour of the purchaser along with the details regarding the date, registration number and also the name of the parties to the deed.

3. Possession of property is very important. The Seller should hand over the vacant possession of the property to the purchaser. In order to ensure that the seller is in actual possession of the property, the purchaser should inspect the property a day prior to the registration. If the seller is in physical possession of the property then handing over the vacant possession of the same is very easy. On the other hand, if the property is in occupation of the tenants, it is very important to ensure that the tenants are vacated before registration. However, the fact that the seller is in physical or constructive possession, has to be clearly incorporated in the sale agreement. As per the terms of sale agreement, the purchaser should receive all the keys of the property at the time of registration. If possible, main door lock can be replaced with the new lock. In case the property conveyed to the purchaser is a vacant site, it is necessary to put display board with the wordings “This property is owned by ‘X’ trespassers will be prosecuted”. Further, fencing around such sites or constructing compound wall, though expensive, is preferable. Periodical visits to the site are also advisable in order to detect encroachment over the site, if any.

Consent Letter

The purchaser should verify that all the taxes, statutory payments in respect of the property including power, water charges are paid up-to-date by the seller. Further, the purchaser must collect all the receipts for the statutory payments and should also verify at the concerned offices, whether there are any arrears is there or not. Power and water supply agencies collect deposits from the consumers before providing services. In order to transfer such deposit in the name of the purchaser, consent letter from the vendor has to be obtained from the vendor.

Registration of Khatha:

Khatha Certificate and Khatha Extract are one of the mandatory and important documents to prove the present ownership of the purchaser over the property after execution of the sale deed. Purchaser must ensure that the Khatha in the records of the local bodies, gram Panchayath or the city corporation is transferred to his name.

Both the seller and purchaser have to sign the application for transfer of Khatha, which is better if done simultaneously while signing the sale deed in order to avoid any future disputes. Application for Transfer of Khatha has to be duly filled along with copy of the sale deed enclosed and the same has to be submitted before the concerned authority and to obtain acknowledgement to that effect. In case of the property falling within the limits of BMP, then applications for Khatha transfer may be filed in any of the citizen service centers or any of the 30 revenue offices along with the documents mentioned in Sarala Khatha Scheme Book. Documents required to be produced includes Mother Deed, sale deed, National Savings Certificate of Rs.200, sketch showing the site details and Betterment charges paid receipt. If the Khatha has to be transferred in the name of one of the co-owners, then No Objection Affidavit declaring that they do not have any objection for transfer of khatha in the name of the applicant, duly sworn before the notary by the remaining co-owners, has to be submitted along with the application for transfer of khatha and other required documents.

Sarala Khatha Scheme Book, introduced by BMP, gives all the details about the services of the Revenue Department, documents to be filed, fees required to be paid, working hours and also rates for assessment of property tax under the Self-Assessment scheme.

For transfer of Khatha in the name of the purchaser, transfer fee will be collected and subsequently written confirmation of such transfer endorsement will be issued in the name of the purchaser. During the process of transferring Khatha, the property is again re-assessed on the basis of revised property taxes, if any, and then issue assessment notice in the name of the purchaser. It is very important that the tax paid receipt should be in the name of the new/present owner.

Khatha Extract

After issuing Khatha Endorsement, we have to apply for Computerized Khatha Certificate and Khatha Extract. Khatha Extract reflects the name of the Present Owner, Tax assessment details, sital area and Built up area.

CMC Khatha

If the property has falling under the CMC jurisdiction, Khatha Endorsement is issued in the name of the Present Owner. City Municipal Councils (CMC) were issuing Form No.19, CMC Khatha in the name of the Present Owner. Now-a-days Form No.III Khatha is being issued to the properties falling within the limits of CMC since issue of Form No.19 has been stopped from 29/05/2003.

The properties falling within the limits of Village Panchayath, Form No.9 and 10 is issued in the name of the Present Owner, which refers to Assessment Order and Assessment Extract.

Transfer of Electricity supply

After the Municipal authorities transfer the Khatha in the name of the owner, water meter and power meter installed are required to be transferred in their name. You have to submit the necessary application along with the deposit transfer letter issued by the previous owner. After completion of all the formalities, water and electricity authority will change the present owner name in their records. The authorities will issue written confirmation of transfer and raise the bills in the name of the Present owner. This will help the owner to verify and check up their electricity and water bills to be raised in future.

Annual property tax and periodical Encumbrance Certificate has to be regularly obtained at least once a year.

After completion of all the post registration formalities, absolute title, right over the property will be conferred to the purchaser thereby enabling the purchaser to enjoy the peaceful and uninterrupted possession of the property.

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BUILDING BLOCKS FOR YOUR HOME

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India is a vast country, having a population of more than 1000 million. Many are without owned shelter. After independence, the successive governments addressed this problem with various government-sponsored programmes. They are targeted at poorest of poor, and houses with barest facilities were provided.

The problem was too gargantuan to be met with government alone. The government of India established National Housing Bank, under the supervision of Reserve Bank of India. Scheduled commercial banks, co-operative banks, were also directed to lend for purchase/construction of houses. In the beginning 1.5% of incremental deposits of commercial banks during 1988 was earmarked for housing finance sector, which was enhanced to 3% during the year 1999 and subsequent years. The banks were given freedom to exceed this stipulation depending upon their resources. The slow down of economy, slump in the demand for loans from corporate sector goaded banks to aggressively market housing loans. In the course of the time, banks have overtaken the housing finance companies in market share. The easy availability of finance, the tax benefits extended by the union government and increased earning/spending capacity of middle class, mostly wage earners have fuelled the growth of this important sector.

Change of Mindset

Owning a house, previously was the last priority, mostly at the time of retirement from out of terminal benefits savings as one could rarely find the means of financing the purchase/construction. This mindset has changed. The youngsters in early twenties are earning substantial salaries, with increased spending capacity. They prefer to own houses out of borrowed funds, which is repaid over a period of time. This helps them to avail of lower interest rates and also tax benefits for longer period.

Legal Scrutiny Report and Valuation

It is very important to have legally established ownership of the property to avail of the Housing Finance. The applicant should have all the documents to establish his title to the property. He should verify the documents available with him/or with the seller and perfect the title to the property. Financing Institutions will rely on the legal scrutiny report of their advocates on panel. In view of the severe competition in the field, many institutions are ignoring the importance of the legal scrutiny, and title to the property, and are giving much importance to the repayment capacity

Apart from perfect title to the property, the valuation of the property is also very important, based on which the loan component will be determined. The banks have approved valuers on their panel, who will value the property and arrive at the market value.

Loan Amount

Many institutions have a maximum ceiling of one crore-per party. The loan depends upon the cost of construction, land, purchase cost, stamp duty, registration charges, legal charges and also other additional expenses. The borrowers may have to bring is 10 to 15% of the cost as margin money. There are institutions, which finance full cost without insisting on margin money. In addition to these parameters, the income of the applicant, repaying, capacity of all the borrowers are being considered Maximum amount that an individual may require is 10-15 lakhs, for a good house, which is within the reach of average wage earner.

Repayment Schedule

The loan is to be repaid in monthly instalments comprising interest and principle called equated monthly instalments (EMI). The amount of repayment remains the same during the entire tenor of the loan.

In case of construction, the loan amount is disbursed in instalments depending upon the progress of construction. The regular repayment commences after the completion of construction or after the expiry of certain stipulated time. Interest for intervening period, from the date of loan to the commencement of equated monthly instalment is called pre-EMI. This has to be paid quarterly or monthly.

Though the repayments offered vary upto a maximum of 20 years, it is preferable to avail of the period of 10-15 years, considering the interest rates, tax benefits and repayment capacity. The repayment period of 5 years attract heavy monthly instalments, which prove to be burden; in repayment beyond 15 years, one has to pay heavy interest. There are institutions, which offer repayment period beyond 20 years also.

Certain banks have special schemes, under which any surplus amount available may be paid though in excess of equated monthly instalment with facility to with draw such amount in case of necessity. The account operates like a current/over draft account. This would be useful for business people. Such schemes are called Home Loan Saving Schemes, where by paying off the loan earlier substantial amount of interest is saved.

Interest

At present interest rates are very low the loans are available at 7.25% but there are signs of interest rates hardening. There are two different types of interest rates floating and fixed.

Floating Rate

Here the rates are not constant, but keep changing. There are linked to market condition. They may increase or decrease. The present floating rates has reached the bottom and there may not be further reduction. The lending institutions are very reluctant to pass on the benefits of reduced interest rates to borrowers. They adopt different strategy to keep the borrowers paying higher rates. In most of the case the old borrowers pay higher rate than a new borrower for a similar loan.

Fixed rate

This is supposed to remain fixed through the tenor of the loan. Fixed rates are higher than floating rates but many banks/housing finance companies have “Force Majeure” clause in their agreement, which gives absolute powers to change the fixed rates.

In general, the fixed rates for loans of long tenor, floating rates for loans of short tenor may be preferred.Many offer a combination of both fixed and floating, where some percentage is charged as fixed or balance as floating.

Reducing Balances

Reducing balance means the period at which the instalments collected from borrowers are credited to the loan account. In annual reducing balances the monthly instalments collected are credited to the loan account once in a year. In monthly reducing balance they are credited on a particular day of month; and in daily reducing banks, it is credited on the same day. Annual reducing balance is mostly costly, where as daily reducing is the best. Many have monthly reducing balance, and few have daily reducing balance.

Hidden Costs

There is no transparency in Housing Finance sector. Apart from interest the borrower has to pay processing charges legal fee, but many other types of fees, such as administration fee, inspection fee, etc. Further the rates at which these are charged are also not clear. In such cases, though the interest rates are low, the hidden costs increase the burden. As stated earlier, interaction with borrowers would help.

Switch over

The borrowers have an option of switching from floating/fixed to other mode on payment of certain penalty. Generally it is 1% on the outstanding loan amount. But recently, the financing institutions have increased fee for switching over. While switching over, consider the penalty payable, the loan balance, the rate of interest available and the balance repayment period. If the balance repayment period if short it is not advisable to switch over.

Transfer of Loans

The borrowers may also transfer the loan to other institutions, which take over the loans. Many borrowers transfer the loans to avail the reduced interest rates available. The interest rates during 1990-2000 were very high. In case of transfer of loan, the borrower has to pay some prescribed fee calculated on the outstanding loan. Apart from such fees, the institution, which takes over the loan, charges processing fee, legal charges etc. They may offer some additional loan also. But avail of such additional loan only in case of absolute need. While transferring the loan apart from interest rate, calculate the transfer fee, processing/legal fee, and mode of reducing balance adopted by the institution, which takes over the loan and hidden costs. If the balance repayment period is small, transfer is not recommended.

Tax Benefits

Home loan borrowers have two types of income tax benefits:

1.Rebate on repayment of principal and stamp duty and registration charges.

2.Deduction of Interest

The Stamp duty and registration charges paid and repayment of principal is eligible of rebate on a maximum amount of Rs. 20,000/- within a over all limit of Rs. 70,000 under section 88 of income tax act 1961.

The interest paid in a financial year on housing loan is allowed as deduction under section 24 of the income tax act 1961. The maximum interest allowed at deduction at present is 1.5 lakhs in case of self-occupied house. This is per individual. If there are more than one borrower, with definite shares in property, each may avail of this deduction, subject to his share, with a maximum ceiling of 1.50 lakhs. There is no such ceiling in case of properties, which are let out. Any amount of interest paid on the loan is allowed as deduction, and the income from the property by way of rent is taxable.

Insurance

Apart from insurance of property, against fire, riot, civil commotion, many insurance companies offer term policies on payment of single premium. These term policies cover risk for certain period and repays the loan in case of any lose of life of borrower.

Selection of Financier

Housing finance is most easily available credit product. All the commercial schedule banks, co-operative banks, extend finance forpurchase/construction of houses. In addition there are housing finance companies specialised in this line. Many of these institutions are concentrated in metro and urban centres. There is severe competition. In general the rates of interest in housing finance companies are slightly higher than banks. Though there is intense competition, there is no transparency in Housing Finance industry. It is better to interact with borrowers of different lending institutions and select the best. If one is a regular customer of any bank, it would be better to borrow from such bank.

While selecting the Financing Institutions, examine the rate of interest, charges for shifting, hidden charges, transparency, and accessibility to the financing institutions. Many institutions operate through direct selling agents, and the borrowers will rarely have a chance to interact with the officials of the institutions. Further there is very little of select between any two institutions.

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