For home buyers, property acquisition provides both tax relief and safe investment

L.N. Revathy

The mad rush for home loans has been attributed to the good number of youngsters having surplus funds for investment and looking for tax concessions too.

Against the milieu of rapid urbanisation, rising interest rates and changing socio-economic scenario, the demand for housing is witnessing explosive growth.

The National Building Organisation has estimated the total demand for housing at 2 million units per year and the total housing shortfall at over 19 million units. Bankers and home-finance institutions are quite upbeat about the trend.

For homebuyers, property acquisition provides both tax relief and safe investment, particularly because property prices and rental values have started to move up.

Easy home loans

Banks and housing finance institutions have, compared to yesteryears, turned more liberal in extending support. A home loan can be availed itself of for any purpose such as in improving the aesthetics, in refurbishing the kitchen or bathroom, a luxury holiday, for buying a dream car or repaying credit card or other dues. The rate though, could be marginally higher than the home loan rate, in the case of such top-up loans.

The banners at almost every branch of State Bank of India talk about the bank's festival offers Dusshera/ Diwali/ Ramzan (loans for housing, car, personal).

Banks also offer to waive the processing fee during the festive offer period and reward the borrower by giving a discounted rate. And the mad rush for home loans is understandable, considering the fact that a good number of youngsters start their career with a good package, have surplus funds for investment and look for tax concession as well.

Making the right choice

With different banks offering different schemes to suit its customers, service sector officials feel that the borrower should be extra careful while choosing a home loan from the respective bank. "Youngsters, especially, window-shop before finalising the rate and deal with the bank or home finance company like ours," says Mr J. Vijayakumar, Relationship Manager, Sundaram Home Finance.A majority of the borrowers, lenders say, opt for 15-year tenure, but rarely do they continue to the full-term.

"Over a period of time, their income level goes up and they have disposable surplus for repayment of home loan dues. They close the loan in about 10 years. When this happens, we have excess funds and will be compelled to find another borrower. We therefore, do not encourage foreclosure. To dissuade borrowers from foreclosing their account, we impose a levy," says Mr Vijayakumar.

Rescheduling loans

Lending institutions say that rescheduling of loans was also happening in a big way.

Meanwhile, interest rates have started inching upwards, especially in the case of housing loans. The successive credit policy reviews by the Reserve Bank of India, and the increases in repo and reverse repo rates have further triggered this phenomenon. Most banks have already increased the interest rates in the range of 25 to 50 basis points, depending on the tenure. Fixed rates are have gone up further. And the fear is that the rates could climb up further.

Home buyers who had hitherto opted for floating rate, now prefer to take the fixed rate route. But ask lending institutions which is better. Says Mr Vijayakumar, "As a company, it would be good if the customer opted for the floating rate as the risk would be shared."

(This article was published in the Business Line print edition dated March 28, 2006)
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