Monday, 27 April 2015

Expat NewsBurst: A Few Surprises in Your Home Loan Agreement

This is a good time for home buyers, with several lending institutions slashing their rates recently. have a tendency to skip through the details of a home loan agreement. That should not be the case. Borrowers need to keep in mind a few key clauses while signing the agreement to avoid unpleasant surprises later.


Cross-collateralisation of other loans: Imagine a scenario where you have taken a as well as a home loan from the same institution. Without your knowledge, you could have actually given your home as collateral for the personal loan. Some lending institutions have an 'Indebtedness of the Borrower' clause where the home is automatically made available as a security for all past, present and future borrowings of the with the same institution. Effectively, your personal loan is secured against your home but the rates being charged are at par with an unsecured loan. In such a scenario, a top-up on the existing home loan would have worked out to be far cheaper than your personal loan.

Worse, few institutions cover borrowings from their associates, subsidiaries as well as affiliates under this clause. So, if you have taken a home loan from XYZ Bank Ltd and a car loan from XYZ Car Loans Ltd, a group company, your home could serve as an additional collateral for your car loan. In some cases, the lenders may have an unconditional right to set off any amount paid by the borrower as per the against other borrowings of the borrower with the bank or its affiliates, associates or subsidiaries even without any prior intimation to the borrower. Hence, it is always recommended to have your home loan from an institution with which you do not have any present unsecured obligations.

Schemes where equated monthly instalments (EMIs) are borne by the developer: In a typical 75-25 or 80-20 scheme, the borrower takes a loan and the developer agrees to pay interest till possession or a specified period, say, three years, whichever is earlier. Generally, the developer is paid based on the stage of construction. However, in some cases, there are accelerated disbursements - for instance, when the completion stage is only 60 per cent, 80 per cent of the loan gets disbursed. Since the developer is bearing the interest burden, the borrower may not be too concerned. However, the loan is taken in the name of the buyer, so, if the developer defaults, any delay or default will appear in the Cibil report of the buyer for no fault of his. Further, the buyer will be forced to pay interest once the specified period expires even though the property is still under construction.

The situation becomes even more precarious if the buyer intends to exit the project midway - many developers charge prohibitively high transfer fees ranging from 2-5 per cent of the completed project value, which effectively increases the exit fee percentage in the case of an under-construction property. For example, if someone had purchased a property at Rs 5,000 per sq ft with a 3 per cent exit fee and he exits the project when it is 50 per cent complete, he ends up paying an exit fee of Rs 150 per sq ft (3 per cent of Rs 5,000) on an investment of Rs 2,500 (or 50 per cent of the total cost), amounting to an effective exit fee of 6 per cent.

Further, where accelerated disbursements have been made, it becomes virtually impossible to exit till construction reaches the level of funding. In many cases, buyers are forced to exit at a loss to relieve the burden of the home loan. Hence, the immediate past track record of the developer, management ethos of the promoters and the stage of completion of the project need to be considered before opting for such schemes.

Unconditional right to amend terms and conditions: Few agreements have an open-ended draconian clause which gives the lenders sweeping rights at their discretion, to amend, recall, suspend or terminate the home loan agreement irrespective of whether the borrower had complied with the provisions of the home loan agreement or not. Such lopsided agreements are extremely unjust to the borrower and puts him entirely at the mercy of the lender at all times.

Setting off other balances: Some loan agreements provide for an unconditional right to set off home loan dues against balances in all other accounts of the borrower, including fixed deposit accounts. So in the event of a strain in repayment of EMIs, the banker has the right to dig into to your savings account, recurring deposit or fixed deposit balances to service your EMI without your consent.

Prior approval for any further leverage: Most lending institutions provide that the borrower shall not obtain any further loan or guarantee any further liability without their prior approval. This makes it mandatory for a borrower to approach the lender for a No Objection Certificate (NOC) for any future borrowing.

Prohibition on leaving India: Most of the loan agreements prohibit the borrower from leaving India on long stays for the purpose of employment or business overseas without fully repaying the home loan. Where there is a practical need to leave India, it is advisable to inform your banker and obtain an NOC.

Onus of clear and marketable title: Assuring yourself that your property has a clear and marketable legal title is important. However, few buyers take independent legal opinion on the title of the property as they feel that the home finance institution funding the property would have done their due diligence. While all lending institutions do their legal due diligence, a lot of weightage is given to the profile of the borrower and the institution's relationship with the developer. For a banker, the loan is given to the borrower and the property is only a security for the loan in the event of default. Most agreements provide that the onus of verifying the legal title is entirely on the borrower and not the lending institution.

Every borrower provides a personal guarantee to the banker for repayment of loan, signs a demand promissory note and provides post-dated cheques for the loan value. There have been instances where serious legal issues have been ignored by bankers for various reasons.

SOURCE: Business Standard,
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Wednesday, 15 April 2015

Expat NewsBurst: Home Delayed is Tax Sops Denied

A ROOM SHRUNK:If you don't get possession of your house within 3 years of taking a loan, deduction benefit will be `30k per year, not `2 lakh
Sachin Kala is still waiting to get possession of the flat he booked four years ago. Even though Kala has paid almost 80% of the total price, the project is still not ready to move in.Kala's only solace is that he is not alone. According to real estate analytics firm PropEquity , around 45% of the 3,753 projects in the Mumbai Metropolitan Region offered for possession during 2011-2014 is still not ready . The problem is more acute in Delhi NCR, where a whopping 78% of the 856 projects has got delayed. The same trend is visible in other major cities like Bengaluru, Chennai, Hyderabad, Pune and Kolkata.
The Real Estate Regulatory Bill that has been approved by the Cabinet and will be tabled in Parliament soon has several buyer-friendly clauses. The bill proposes that builders deposit 50% of the amount received from buyers in a separate escrow account. This will prevent diversion of funds and timely execution of a project. Also, a buyer can claim full refund with interest if a builder fails to deliver on time.



STRUGGLING WITH EMIS

The delay in possession can be financially debilitating for both first-time buyers and investors. Many buyers factor a 10-12 month delay into their planning when they book but very few expect the delay to extend beyond two years. However, housing projects across the country have got delayed by 24-36 months. End-buyers like Kala, who expected that EMIs will replace the rent payment, are seeing their monthly budget spiral out of control because they have to fork out money for both. The situation is not any better for investors who bought their second or third house. They had expected that their investment will start earning rental income, which would take care of some portion of the EMI.However, their calculations have gone awry due to the delay . They are paying EMIs but there is no sign of rental income yet.LOSING TAX BENEFITS A delay in getting possession also implies you will not be able to benefit from any kind of tax deduction until the project is completed. Home buyers count on the tax breaks provided to them in the form of deduction up to `1.5 lakh towards principal repayment (included under Section 80C) and a further deduction up to `2 lakh towards interest payment (included under Section 24). However, to get deduction under Section 24, the buyer must get possession of the property within three years of taking the loan. If the three-year deadline is not met, the deduction benefit reduces from `2 lakh to only `30,000 a year. For a buyer who has taken a `50-lakh home loan, a project delay would translate into a tax loss of `10.9 lakh over a 20-year period (see graphic). In case of a joint loan, the tax loss could be even higher.

One possible way out of this situation is by selling the delayed property and buying a ready to move in property . However, real estate transactions cannot be done very quickly . They also have very high entry loads in the form of registration charges and transfer fees. Also, the seller may not get a very good price for the delayed property while the ready flat will demand a premium.

Mercifully , the three-year rule does not apply to property that is to be rented out as the entire interest is deductible even if the construction extends.So, people who have bought real estate as an investment and intend to rent it out can breathe easy . “There would not be any tax-related loss. However, the tax benefit gets deferred till you get posses sion,“ says Sudhir Kaushik, CFO and co-founder, Taxspanner.

Another solution is to delay the home loan by funding the first few instalments out of your savings. The three-year countdown begins not from the time you booked the flat but from the last day of the financial year in which the loan was taken. You can liquidate some of your investments to pay for the initial instalments. However, do consider the opportunity cost of utilising the money versus investing it in some other asset class.

AVOIDING DELAYED PROJECTS

Due diligence can protect consumers against unscrupulous practices by developers. Assess the builder's track record. Ensure the developer has clear titles and necessary permissions. What are the terms of payment? If the builder is asking for most of the cost at an early stage of construction, beware. Even in construction-linked payment plans, you could face problems during the finishing stages. Under these, almost 70-80% of the loan is disbursed by the time the structure is complete and it is at this stage that a cash-starved project will slow down. Even a year's delay will add hugely to your interest cost.Interest-subvention schemes that promise to bear the EMI burden till possession or for a fixed period of onetwo years are also an eye-wash. Some developers may offer plans where a substantial portion of the cost has to be paid after possession. Only such plans are favourable to the buyer.

SOURCE: Times Of India
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