If you are a middle class, salaried individual, buying a house or flat of your own has become really difficult. The main reasons are the high property prices, and the high interest rates for home loans.
But now, there is another factor that is going to make home purchase even more difficult for you. Read on for full details.
How much loan do you get?
When you approach a bank or financial institution for a home loan, they give 80% of the cost of the house as a loan to you (for homes costing more than Rs. 20 Laks), and you have to provide 20% of the amount from your own pocket as the down payment. (This 80% is also called the “loan to value ratio”).
And what is the amount that is considered as the cost of the house? Here’s the list:
- The amount paid for the house as mentioned in the sales deed
- Stamp duty paid for the purchase
- Registration fee paid for the registration of the documents
- Any government taxes paid on the transaction, like the Value Added Tax (VAT) and Service Tax
This is soon going to change.
The Reserve Bank of India (RBI) has a new rule
The RBI has come up with a change that would reduce the amount you would get as home loan from banks.
The “loan to value ratio” remains the same – you would still get 80% of the cost of the house as a loan. However, the RBI is changing the definition of what is considered to be the cost of the house.
Only the following would be considered as the cost of the house going forward:
- The amount paid for the house as mentioned in the sales deed
The following would NOT be considered as the cost of the house from now on:
- Stamp duty paid for the purchase
- Registration fee paid for the registration of the documents
- Any government taxes paid on the transaction, like the Value Added Tax (VAT) and Service Tax
What does this mean for you?
This change in definition of what is included in the cost of the house, and what is not, has a huge impact on you.
Depending on where you are buying the house and the rates of various taxes applicable there, you would effectively get only 70% – 75% of your expenses as a home loan.
So although on paper, you still need to pay only 20% as the down payment, you would be paying anywhere between 20% – 25% if you add stamp duty, registration and other levies.
Since the cost of a house or flat runs into tens of lakhs of rupees, this would have a significant impact on your ability to buy a house of your own.
Example
Let’s run some hard numbers to see the impact of this change.
Let’s say you want to buy a flat in Mumbai. Following are the cost elements:
- Sales agreement: Rs. 40 Lakhs
- Stamp duty (5%), registration, value added tax (1%) and service tax (2.6%): Approximately 9% or Rs. 3.60 Lakhs
- Your total expense: Rs. 43.60 Lakhs
Situation till now
So far, you got 80% of the total expense. So,
- Home loan amount: Rs. 34.88 Lakhs
- Your out of pocket expense: Rs. 8.72 Lakhs
Situation going forward
From now on, you would get a home loan for 80% of the sales deed amount. Therefore,
- Home loan amount: Rs. 32.00 Lakhs
- Your out of pocket expense: Rs. 11.60 Lakhs
Conclusion
As you can clearly see from the example, this change would mean that you would need to save up much more before you can buy your own house now.
So be prepared to wait a little longer you dream home.
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