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The recent hike in interest rates will further erode the payback capacity of home loan consumers, writes
S.C. Dhall
With the inflationary trend persisting in the economy, more and more bankers and lenders are raising the interest rates on home loans. Following in the footsteps of major public sector banks like the SBI, PNB and Canara Bank, others too have decided to hike their prime lending rates (PLR) in the range of 0.25 to 0.75 basis points. Those who have not already announced a hike are likely to do so after July 15. The largest home loan lender, HDFC Ltd, and the ICICI Bank have also jumped on to the bandwagon by increasing the interest on home loans by 0.50 to 0.75 basis points (bps). This obviously means that all fresh borrowers and the existing ones who had raised loans under the floating rate option will now have to shell out more. This applies not only to home loans, but all kinds of consumer loans too. For those who have bought houses on borrowed funds, it is a double whammy. On the one hand, the high rate of inflation, touching 12-13 per cent, is already eating into their monthly budgets and, on the other hand, the rise in interest rates will now push up their EMIs substantially. Banks are now beginning to fear that the rise in EMIs might increase the default rate and if this happens, their profitability will take a beating. And to offset that, the banks may further hike the home loan rates to cover up for the higher risk of default. According to experts, the RBI has taken this step as a measure to tackle inflation but banks have become smart enough to take a cue from the revision in the repo rate and cash reserve ratio effected from time to time, and set their interest rates individually. What it all boils down to for them is a trade-off between the margin, loan, growth and asset quality. The hike in interest rates would mean a further erosion of the buyers’ capacity to purchase property. According to reports, higher EMIs are now becoming a political issue. There is often a pressure on banks not to raise lending rates. On an average, the monthly installment on a 20-year-long Rs 10-lakh loan has gone up by 50 per cent to Rs 12070 (13.5 per cent) from Rs 8060 (7.5 per cent) five years ago. The last time the home loan rate in India had skyrocketed— to about 18 per cent— was in 1995. Ideally, banks must balance the needs of the savers and investors. That, in fact, is the primary function of the interest rate mechanism. Banks are now planning to lower the EMI for a large number of borrowers by enhancing the tenure of their home loans and this is likely to be done for those borrowers whose age is less than 45, so that the entire amount of the house loan is liquidated before their retirement. Only borrowers with a good track record are to be given the option. This is likely to reduce the burden on the borrowers for the time being. Also, with the rise in the interest rate in the last couple of years, many have found their monthly EMIs rising by over 20 per cent. No doubt, the monthly outflow will come down due to reduced EMIs. But the rise in tenure implies that the interest payout will be much more. Take a 30-year-old borrower, whose home loan payout over 20 years is Rs 52,55,000. Since the person has age on his size, any increase in the tenure will reduce his EMI. Now, say, the same person had to take the same amount at the same rate of interest but for 25 years, the EMI would be Rs. 36300. In other words, the EMI has come down merely by Rs 2300 per month, while the loan tenure has increased by a good 60 months in this case, and the interest payout will be Rs 69,00,000 approx, that is an interest burden of Rs 16.45 lakh. In fact, most financial planners would advise against this. The basic idea is to reduce the payout to the bank instead of increasing it. This idea is actually helpful only for those are finding it difficult to pay the EMIs. It is housing, healthcare and education that have the potential to eat up a substantial chunk of the family income. Inflation may not impact all aspects of housing, but it does hurt those individuals who want to buy homes or take loans to upgrade existing ones, say experts. Even those who have already bought homes and are paying off their loans will find their interest rates further going up by at least 1 per cent. Their total hike will come to around 4 per cent in just one-and-a-half year. Thus, in this situation it’s tough to be a loan survivor.
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Realty cheque
Experts want new financing options for housing
Under pressure from the demand slowdown, the real estate sector must find innovative financial structures to tackle the increasing interest rates, experts say. "Though liquidity was not an issue earlier, the balance between risk and return is gaining importance and, therefore, a look at innovative financial structures becomes important," chairman and country head of Jones Lang LaSalle Meghraj Anuj Puri said at a CII conference in Mumbai recently. Puri said while the demand for housing remains, the industry has to anticipate the needs of the end users as the cost of acquiring houses or commercial space goes up on higher interest rates. He said the performance of real estate players is an important issue for the stock market as well. Leading real estate firms like DLF, Unitech, Omex and Shobha Developers have lost over 50 per cent value in the share market in the last few months, as the government and the RBI have chosen to opt for tight monetary policies to fight inflation. Speakers said affordability had become a big question in the backdrop of the cost push by increasing raw material prices and high interest rates. "Affordability of prices is important in Tier-II and III cities," Peninsula Land executive vice-chairman Rajeev Piramal said. CRISIL Risk and Infrastructure Solutions managing director and CEO Hemant Joshi said real estate prices could come down if the government followed proper infrastructure township policies.
— PTI
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‘Interest hike beyond 1.5 pc will hurt‘
With the rising inflation and interest rates leading to a slackening in property demand, a one to one-and-a-half per cent increase in interest rates can further impact the real estate sector. "The demand is already slackening. The real estate sector can absorb another 100 to 150 basis points (bps) rise in interest rates, but anything beyond that will hit the industry hard," a real estate money management and services firm chairman Anuj Puri has cautioned. The current trend of a drop in demand will continue for another 18-24 months as there is no sign of inflation cooling down and a high chance of interest rates becoming harder, he says. Puri, however, adds that there is no shortage of demand in Mumbai and Delhi, but in other parts of the country far lesser property transactions are taking place.
— PTI
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GREEN HOUSE
As a horticulturist, I salute amateur gardeners for the tremendous service they are rendering to the cause of biodiversity. This they’re doing by introducing new species and varieties of flora from time to time. Thus, knowingly or unknowingly, they have become a source of biodiversity conservation in this region. A keen gardener, wherever he goes, is always on the lookout for something new, something different from what his friends have. This healthy competition leads to the introduction of new species. This is facilitated by the conducive climatic conditions here. Over a period of more than three decades, I have seen a gradual horticultural improvement with the introduction of new species. Even while judging flower shows, we are curious to see what’s new in various categories. There have been changes in the indoor plant species too. To quote a simple example, first there was the plain rubber plant that was replaced by the Decora variety, the one with a deep red or deep maroon tinge. Then, came the rubber plant with white or yellow variegation, which became popular with gardeners. It was replaced further by rubber plants with a maroon tinge and white variegation. Now you have the variegated Barh too. As you know, most of the pineapple comes from the eastern part of our country. Horticulturists have made a selection of the ornamental variety of this plant too (See the accompanying picture.) The colour of the fruit is deep pink and the leaves are distinctly striped yellow. This plant was gifted to me by Justice S.S. Kang, former governor of Kerala, a few years back. The plant took a few years before bearing the ornamental fruit but the picture speaks volumes about its beauty. His house is a virtual conservatory of varied flora. Flower shows and competitions are other places where new ornamental species get introduced. Those who bring in a new specimen surely have an edge over others. All those species like Vriesea, Bromeliads, Heliconia, Liatris, Lilium, Anthuriam, Bird of Paradise etc. reached the competitions over a span of time, as part of the race to win a prize. Now amongst these species too, strange selections and variations are being introduced by amateurs that are amazing. Such displays also encourage others to vie for the same or a different kind of exhibit in their garden. Local nurseries too play an important role in the introduction and conservation of new biodiversity. Knowing the ‘weakness’ of their elite clientele, they introduce plants from all parts of the country and this is also how new species reach and get introduced and established here. However, a word of caution; out of over-enthusiasm do not try untested exotic fruits, lest you waste precious time and money. You may have seen some such varieties doing well in far-off lands but that is no criteria for their success under our conditions. You may be in for a total surprise when you get either no fruit at all or a little of it, that too of poor quality. The bottomline is: ask the experts of the Horticulture Department or an agricultural university before planting such varieties, especially for commercial plantation. The writer is a senior horticulturist and can be contacted at
satishnarula@yahoo.co.in
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CONCRETE ACTION
SVIL Mines Limited, a world’s leading marble processing unit, has introduced exclusive marble boutiques called Café Floriana, a totally new concept for branded marble retailing in India, starting in Delhi, Mumbai, Bangalore and Kolkata. Through these signature stores, the company will introduce a first of its kind pre-polished, cut-to-size range of marble with a distinct identity to compete with the world leaders, including the Italian marble industry. Floriana Marble will be unmatched by any other marble for their quality, finish, gloss and thinness, according to a Press release. Says Amit Vohra, head, marketing and international business, SVIL Mines, “It is a very fresh and innovative concept in India. Floriana Marble will have the glaze of mirror and will be unmatched by any other marble brand for its quality, finish, product benefits and applications.”
CHD City enters Karnal realty mart
CHD Developers, one of India’s leading real estate developers, has announced the formal opening of bookings for residential plots at its mega project, CHD City, an integrated township spread over 200 acres in Sector 45 on GT Road in
Karnal, Haryana. Duly approved and licensed by the Directorate of Town and Country Planning
(DTCP), Haryana, CHD City is offering residential plots in sizes of 300/350/500 sq yards and is expected to house over 25,000 families, according to a Press release. Says Gaurav
Mittal, director, CHD Developers, “Karnal and its surroundings define the future of urban life, a finely tuned balance of commerce and lifestyle. We are confident that CHD City with its myriad features will find favour with those who seek an affordable yet quality
lifestyle.” CHD City promises the best of amenities in fine dining and entertainment, including a mall, food court, hotel, clubhouse, commercial
centre, school, multiplex, play area for kids, jogging tracks, etc.
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TAX TIPS
— Asha Rani A. The facts given in the query do not indicate whether the agricultural land owned by your grandfather was self-acquired or family owned. In case it was a self-occupied property of your grandfather and the same has been inherited by your father, it would not be possible for you to make a claim in case your father makes a Will in favour of your brothers. However, in case it was a family property your father can make a Will in respect of his share in the said property only. The daughters being co-parceners in accordance with the amended Hindu Succession Act, 1956, he cannot make any Will with respect to the share in the family property belonging to the other members of the family.
Inheritance issues
1. To what extent is the family pension received by a widow exempt from income tax for the financial year 2007-08. 2. Can the widow’s married daughter legally claim a share in the family pension received by her mother? 3. I am a senior citizen and have recently got transferred in my name (on the basis of a registered Will of my father) a house acquired by him out of his own earnings. I have a son and a daughter who are married and quite well-off. Can I make a Will in favour of my wife alone? — R.S. Cheema, Hoshiarpur A. The answers to your queries are as under: (i) The family pension received by a widow is not exempt from income tax. However, a sum equal to 33 per cent and 1/3rd of such income or Rs 15,000, whichever is less is allowed as deduction from the family pension. (ii) A daughter, whether married or unmarried, is a legal heir and is placed in Class 1 category. She has a right of succession to the property of her deceased father and therefore should have a claim on the family pension to the extent of her share in that property. (iii) If the property of your father was self-acquired, you have every right to make a Will in favour of your wife with respect to the residential property you have inherited from your father.
Shared investment
Q. My son intends to purchase a flat. In view of the rising costs, our plan is that the flat may be purchased in joint names – son, his wife and his mother. It is intended that the flat shall be registered in the name of all the three with a proposed partnership of 40:30:30. All three intend to contribute to the total cost of the flat, including the pre-EMI interest, preliminary expenses, up-front contribution and any other expenses that the loan does not cover, in this same ratio. Can each of the three claim the benefit of return of principal amount, proportionate to their contribution, with a ceiling of Rs1 lakh each or for each of the partners, the ceiling shall be in proportion of Rs.1 lakh? Similarly, for the interest portion, can the ceiling amount of Rs.1.5 lakh be taken by each of the partners? — R N. Kapur A.
The answers to your queries are as follows: On the basis of the facts given in the query it should be possible for each one of the parties to claim the deduction in respect of the repayment of loan towards the principal amount under section 80C of the Income-tax Act 1961, provided the repayment of loan is made by each one of them, separately from their own sources. Similarly, it should be possible to get the deduction under Section 24 of the Act with respect to payment of interest, provided the payment thereof is made by each one of the co-borrowers from their individual sources.
Calculating capital gain
Q. I purchased a house which was under construction in March, 2006. I have paid installments towards its construction, which was completed in February, 2008. I have been given possession thereof and intend selling it in a month or two. Please let me know what
will be the nature of tax which I would have to pay on the aforesaid transaction. — Amit Khanna, Patiala A.
The period of holding of the house by you being less than three years prior to the date of sale, the capital gain arising on it would be a short-term capital gain, which would be taxed at the normal slab rate. Such income arising from short-term capital gain will be aggregated to the other income for the purposes of taxability.
The writer can be contacted at sc@scvasudeva.com
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Q. My father owns agricultural property which he inherited from his father. We are two brothers and two sisters. Of late, due to some differences in the family, my brothers have forced my father to make a Will against the sisters, debarring us from inheriting. Please advise if, under the law, we can protect our share in this immovable property. Both of us are married. 
Q. Your advice is solicited on the following points: