Personal Finance: Home Cheap Home

If all you ever wanted was a house of your own, this is the time to make it happen. Lower real estate prices and interest rates have put some great bargains on the market.

Quick, what's an average Indian's most cherished dream? My networth against yours, it's a house. Have your own four walls and a roof, and the world changes. No more house hunting every two years, no nosy landlord to deal with, no rent robberies and, hey, you can even use nails to hang all your favourite paintings and pictures.

''Yeah, yeah...we all know that. But what about the money?'' you say. Relax, folks. Things have just got a lot better. For Rs 12,750 a month (on a loan of Rs 10 lakh payable over 15 years at the current rate of 13 per cent) a two-bedroom house worth Rs 17 lakh in suburban Mumbai (or Rs 13 lakh in Delhi) could become your very own. Prefer Bangalore? No problem. Muster up Rs 15 lakh, and a two-bedroom house in Koramangala could be the scene of your house-warming party tomorrow.

What's helping turn this middle-class dream into a reality? A number of things. Most importantly, speculators are effectively out of the game. The real estate boom of 1995, when a roaring economy and the entry of hordes of multinational companies sent real estate prices soaring, has sobered down. So much so that real estate prices are a third off their 1995 peak. The Reserve Bank of India (RBI) has been regularly slashing interest rates, with the result that housing finance loans that came at an interest rate of 16.5 per cent to 18 per cent four years ago are now available at 11.5 per cent to 13 per cent or lower. And Budget:2000's saving grace are the sops it has handed out to the housing sector. For instance, it allows interest payments upto Rs 1 lakh and principal payment of Rs 20,000 to be exempt from income tax.

To top it all, housing finance companies are aggressively wooing customers. ICICI Home Finance, for instance, actually makes its marketing agents go on door-to-door calls. Notes Keki Mistry, 45, Deputy Managing Director, Housing Development Finance Corporation (HDFC): ''Housing has now become more affordable.''

Buying a house in smaller towns is relatively cheap and easy. But if your pad is in a metropolis, be prepared to shell out substantially more. That's why you need to really scour and sift through financing options. Your first step must be to figure out the size, location, and price of the house you have in mind. Take some time to work out your future income, and expenditure. You may be a 'double-income-no-kids' (dinks) couple, in which case you should go in for a two-or three-bedroom house to begin with. Adding rooms or buying a new house later on will prove very expensive.

If you are 40-ish with teenaged children, you may have to invest a lot in their education and marriage. A two-bedroom house, large enough for you and your wife is a good compromise. Reason: your retirement is not too far off, and if you are able to give your children the benefit of a good education, chances are they'll end up making enough to be able to buy houses on their own. Agrees Kranti Sinha, 57, CEO, LIC Housing Finance: ''Since rented housing is not a lucrative proposition, it's essential to plan the housing requirement carefully.''

Part of that problem will be solved by the housing finance company itself. Not just because competition is turning them into housing advisories. Rather, your loan entitlement will not be allowed to exceed your repayment capacity. Some companies even take into account the applicant's level of education, number of dependents, and future income streams. Explains Hemant Wagh, 37, Vice-President, Tata Housing Finance: ''All these determine the repayment capacity of the borrower.''

Typically, loan entitlements range from 20 to 30 times the annual gross income of the borrower. The loan tenures usually range from 15-20 years. SBI Housing Finance currently offers 15-year loans, and is planning to raise it to 20 years. Others such as HDFC, LIC Housing Finance, and Punjab National Bank already have 20-year schemes. With a longer tenure loan an individual can borrow more.

Some companies give loans for as long as 30-35 years. Maharishi Housing Development Finance Company (MHDFC), for example, has a 35-year scheme. But should you be opting for such tenures? Not really. At a time when interest rates are on the decline, financiers charge higher rates for longer-term loans. Consider ICICI Housing. Its 20-year loan carries an interest rate of 12.75 per cent, but for the higher tenure, it is 12.85 per cent. Sure, financiers give bigger loans if the pay-back period is higher, but these loans work out more expensive. Look at the arithmetic: for a 30-year loan of Rs 1 lakh at the rate of 13 per cent, you have to pay equated monthly installments (EMIs) of Rs 1,112 for 30 years. That's a total of, hold your breath, Rs 4,00,320.

Compare it with a similar loan for 15 years under HDFC's Step-Up Repayment Facility, where the monthly installments increase gradually as the years go by. A Rs 1 lakh loan taken for 15 years, at the rate of 13 per cent a year, works out cheaper. Here's how: In the first three years, you pay an EMI of Rs 1,094; Rs 1,304 between the 37th and the 84th month; and Rs 1,502 from the 85th to the 180th month.

Add them up, and the final amount comes to Rs 2,46,168. That's a cool saving of Rs 1,54,152-enough to fund your children's college education. Says Atul Jog, 35, Business Head (Mortgage), ICICI Home Finance: ''Such a 'balloon' repayment scheme is especially useful if you are in your late twenties or early thirties.''

Eventually, it is for the individual to decide what suits him best. Those borrowers who want as big a loan as possible have no choice but to go in for longer tenures, despite the higher rates. Early foreclosure of the loan, however, can cushion some of the effect. What makes it easier is the fact that almost no housing finance company charges premature repayment penalty any more. Points out S. Datta, 49, Managing Director, SBI Home Finance: ''It has become difficult to justify pre-payment charges.''

Given the overall downward pressure on interest rates, it makes sense to opt for loans that are pegged to the prime lending rate (PLR) and move up or down along with it. HDFC and SBI Home Finance, for instance, offer variable interest rates. But any hike in the PLR will hurt you.

Ergo, fixed rate schemes are advisable, since they insulate the borrower from market vagaries. An individual can shift from a fixed rate scheme to a flexible one, but not vice-versa. SBI Home Finance offers variable interest rates linked to the PLR. Besides, while most of the housing finance companies allow borrowers repayment at the end of the financial year, Housing and Urban Development Corporation, GIC Housing Finance and SBI Home Finance allow customers repayment on a 'monthly-rest' basis, where principal repayments are credited every month. Interest rates, when calculated, on this basis work out 0.35 per cent less than that for an annual repayment system of a 15-year loan.

Buying a house is a once-in-a-lifetime affair. So, do as much homework as possible about the house, the seller, the locality and its geography. Only then will your house be your home.

WHAT IS EMI AND HOW IT IS CALCULATED EMI, or Equated Monthly Instalment, refers to the amount of money that one has to pay every month to the financier. When one takes a loan, the rate of interest, the loan amount, and the repayment tenure are taken into consideration to fix the EMI. The EMI remains constant through the repayment period. EMI payments at the start of the loan are tilted towards interest payments and principal repayment takes place towards the end of the loan tenure.
Year	Principal outstanding	Equated annual instalment	Interest component	Principal component
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15	2,00,000.00 1,95,438.21 1,90,237.76 1,84,309.26 1,77,550.76 1,69,846.08 1,61,062.73 1,51,049.72 1,39,634.89 1,26,621.99 1,11,787.27 94,875.70 75,596.50 53,618.22 28,562.98	32,561.79 32,561.79 32,561.79 32,561.79 32,561.79 32,561.79 32,561.79 32,561.79 32,561.79 32,561.79 32,561.79 32,561.79 32,561.79 32,561.79 32,561.79	28,000.00 27,361.35 26.633.29 25,803.30 24,857.11 23,778.45 22,548.78 21,146.96 19,548.88 17,727.08 15,650.22 13,282.60 10,583.51 7,506.55 3,998.82	4,561.79 5,200.44 5,928.51 6,758.50 7,704.69 8,783.34 10,013.01 11,414.83 13,012.91 14,834.71 16,911.57 19,279.20 21,978.28 25,055.24 28,562.98
Calculations for a loan of Rs 2 lakh taken for 15 years at 14 per cent per annum