REAL ESTATE FINANCING:
It is financing for the purchase of real property, where real property refers to land or buildings. It‗s a set of all financial arrangements that are made available by housing finance institutions to meet the requirements of housing. Housing finance institutions include banks, housing finance companies, special lousing finance institutions, etc.
Factors Determining the Real Estate
Real estate finance companies consider the following factors before making any financial assistance for housing: 1. Loan Amount 2. Tenure 3. Administrative and processing costs, etc. 4. Pre-payment charges 5. Services 6. Value Addition 7. Sources of finance like HFC's and Banks 8. EMI calculation methods:
1. The Loan Amount The amount of loan that any
HFC decides to provide to a loan seeker depends on the following variables:
1. Customers repayment capacity
2. Rate of interest charged
3. Term of the loan
Repayment it is done through EMI, which includes principal and the interest. As a rule, an HFC fixes the EMI between 30 and 40 percen percent of the net monthly income. For instance, considering a loan of Rs.10, 00,000/- for 10 years, at 13 percent flat interest rate, the EMI would be Rs.19,166.66/-. This way the gross earnings of the loan-seeker must be Rs.54, 761.88 per month, where the installment to income ratio is 35 percent. The general trend in the market is that customers try to obtain loans for longer tenures, without realizing that the longer the duration the more will be the amount paid by them. An increase in the tenure from 10 to 15 years increases the amount payable by 28 percent. In case the tenure of the loan is decreased from 15 years to 10 years, the monthly EMI becomes Rs.16,388.77/-.
3. Administrative and processing cost:
The effective cost of the loan depends on the type of method used by banks or finance companies. Based on the method, the principal component, which is paid monthly, is deducted from the outstanding principal amount. The two methods, which banks and finance companies generally follow, they are:
a. Monthly rest system Under this system, the principal amount is deducted every month from the outstanding amount, and the interest for the following month is calculated on the outstanding amount. This is illustrated as follows: Loan Amount (Rs.) Tenure (Years) Interest (%) EMI (Rs.) Total Payment (Rs.) 1,00,000 5 13 2,275 1,36,500 1,00,000 10 13 1,493 1,79,160 1,00,000 15 13 1,265 2,27,700
b. Annual rest system Under this system, although the principal amount is paid every month, it is accounted only at the end of the year. This is illustrated as follows:
c. Fixed and Floating Rate Customers should check whether the rates offered are fixed or floating (varies with PLR). Floating rates are better in a falling rate scenario, but expensive in an increasing rate scenario. The borrower should check whether it is viable to shift the loan from fixed rate to the floating rate in a decreasing rate scenario by carrying out a cost benefit analysis.
4. Pre-payment Charges:
This is an important factor to be considered, especially in situations where the ability to repay the loan matters. There are certain HVCs which charge pre-payment, in case the loan is repaid before schedule. This pushes up the cost of fund of the borrower. Borrowers who desirous of repaying ahead of schedule should approach HFCs which do not have a pre-payment charge.
5. Value addition:
The value addition includes the additional or supplementary services that HFCs provide, such as fast disbursals of loan, legal services, meeting with brokers, builders etc.,
6. Sources of Finance
1. The National Housing Bank (NHB):
The National Housing Bank (NHB) was set up in July 1988, under an Act of Parliament, and is wholly owned by RBI, NHB, at present, has a paid-up capital of Rs.350/- Crores. It was conceived and promoted to function as the apex institution in the housing sector. The need to set up this institution stemmed from the fact that the housing sector had not received the attention it required, not only in terms of finance for individual loans, but also in terms of buildable or serviced land, building materials and cost effective technology. Loan Amount (Rs.) Tenure (Years) Interest (%) EMI (Rs.) Total Payment (Rs.) 1,00,000 5 13 2,370 1,42,200 1,00,000
10 13 1,536 1,84,320 1,00,000 15 13 1,290 2,32,200
2. Life Insurance Corporate Housing Finance Limited (LICHFL):
The Corporation was set up under the Companies Act, 1956. Incorporated on 19th June 1989, it is recognized by NHB. It commands about 25 percent market share in the housing finance industry. It has a wide network in the industry with 67 Area/Unit Offices and 6 Regional Offices across the length and breadth of the country besides about 5,000 LIC Agents trained for housing finance.
3. Housing And Urban Development Corporation of India (HUDCO):
Incorporated on 25th April, 1970, HUDCO was an expression of the concern of the Central Government towards the deteriorating housing conditions in the country, and a desire to assist various agencies in dealing with it in a positive manner. The principal mandate of HUDCO was to ameliorate the housing conditions of all groups and with a thrust to meet the needs of the low-income group and economically weaker sections.