Wednesday, January 22, 2014


Definitely need to take advantage of that. They have the choice of selling the house and paying the capital gains tax. Should the propertyhappen to be an independent house, they have a chance to jointly develop it with a promoter.

Such an option is not there if the property is a flat. However there is a solution for such people in the form of reversed mortgage scheme. Under this scheme, the person can reside in his own house until he decides otherwise. A certain sum of money will be periodically paid to him/her by the sponsor of the scheme or the sponsor of the scheme could pay certain large sum in one lump sum. According to this scheme, a loan from the sponsor institution may be given to the owner in installments and after his demise, the institution will take possession of the property. It will then sell the house, and if there is any balanceamount it will be paid to the legal heirs of the owner.

A reverse mortgage is the opposite of a mortgage. Where there is a mortgage or a home loan, an individual takes a loan to buy a house and pays equated monthly installments which consist of the principal and the interest on the loan, for the duration of the loan. In the case of a reverse mortgage, thecompany pays an EMI to the individual rather than an individual paying an EMI to the company.

"Sakshan" is India's first reversed mortgage product brought out by Mis. Dewan Housing Finance Corporation Ltd (DHFL). Persons over the age of 60 can avail of this. According to the value of the house, an individual will receive on EMI each month or each quarter. When the value of the house is around Rs. 401- lakh, the owner could receive a payment of Rs. 8,2001- each month, for ten years at a floating rate of interest at 12%. The payment of Rs. 8,2001- which he receives every month is a loan to him against the valueof the house. The ratio of loan to value is 50%. An interest of 12% per year is being charged by the company and that amounts to an interest of one percent each month. Therefore during the first month for Rs. 8,2001- an interest of one percent would come to Rs.82/- which would bring the loan amount to Rs. 8,2821- totally.

A payment of Rs. 8, 2001- would again be there in the second month and that would take the loan amount to Rs. 16,482/-. If this process is repeated for the rest of the period, till the end of 10 years, the total amount of the loan would come to Rs. 20 lakh i.e. 50% of the property valueWhen ten years are over, the couple could go onliving in the house although the monthly payment would cease. At such a point, the owner may renew the mortgage for an amount of 50% of the property value. If the value had appreciated, the owner would be counted fortunate, but if the value had diminished the monthly installment would go down in proportion. Through this scheme, an owner may get some income from his house, even though a small amount.

There is a flaw in the scheme, namely that ifthe property value falls, the loan amount and interest rate will berestructured. It would be good to modify the scheme in such a way, that the property value and the interest rate decided upon at the time of first advancing the loan, should remain the same and the institution being the sponsor, would be able to receive the benefit if there is an appreciation in value of the property. Should there be a fall in the price the sponsor should shoulder the risk as an individual owner is not able to take such a risk in his I her old age, whereas an institution is better equipped to do so. The services of a professional valuer can be used by the owner to ensure that the value of the property decided upon by the institution iffair and correct.

Although real estate developers concede that there has been an acute fall in sales they are reluctant to cut sale prices of their flats in a drastic way in spite of the fact that only few buyers are now in the market. There is a 60 per cent fall in sales according to a real estate expert.

Another fear has arisen because of the liquidity crisis, namely the probability of builders sinking. Sources in the realty industry say that several small and medium players have already begun leaving the scene with their projects half done in spite of the deadline for delivery. A few have abandoned work before it could start. Several well known builders are also considering changing their line overnight. Some say that they will continue to deliver value but they are the exceptions.

As was evident in the Real Estate and Housing Finance exhibition recently held in Mumbai there seem to be tougher time for realtors in the coming six or even eight quarters. Those who visited the exhibition with budgets from Rs 30 lakh upwards in far lung western and eastern suburbs of Mumbai were badly disillusioned. Those wanting to buy two BHK flats for up to Rs 60 lakh were also disappointed, even though the 85 builders took part in the exhibition and more than 800 properties were offered for sale with discounts and incentives such as waiving the registration fee and stamp duty and extra amenities. 

Up to 15 percent discounts, waivers in registration fees or stamp duty and free parking spaces were offered to customers by some developers at the 

property exhibition. However this did not impress buyers according to analysts. Neither did cash discounts change their minds. As the realities are becoming clear it will compel developers to reduce prices even further offering higher discounts to clear present inventory and to stir up suppressed demand in the sector. In other words, the realty developers will be required to cut prices noticeably if they want to convert demand into actual sales.

Housing developers are preoccupied with another key issue namely the land cost. Until last year the high cost but random purchases ofland in Mumbai were linked with the high rate of investments by private equity players and the easily available home loans till the market crashed recently had an important role. The property consultancy firm Cushman & Wakefield estimates that property development activity this financial year will be half of what it was in the last financial year as there is no money.

The chairman of the real estate major Akruti City Limited happens to be a spirited man. He and his brother have gone through turmoil in the real estate business. The meltdown in the market has caused an acute drop in share prices and also in sales of real estate space. Along with rising interest rates in home loans a sharp decline in the numbers of home loan borrowers that is mostly from between 30 to 45 per cent has taken place. He predicts that the market will be in this state for at least another 18 months.

Another real estate major says that they are making an effort to reduce prices. They have brought down selling prices to a large degree by nearly 15 to 20 per cent. Even then it is not leading to sales. Orbit Corporation a reputed real estate developing company has taken a beating on their margins from 35 per cent to 15 per cent recently. According to their spokes- man only if values are reduced between 25-30 per cent across the whole gamut of the Mumbai, the market could witness volumes being revived.
Housing loan companies were also offering 0.5 to 0.25 per cent discounts on present home loan interests.

A cash crisis confronts developers with steep restrictions on bank lending and weak equity markets restricting their fund raising options and the world credit crisis having dried up private equity funding too. Moves by the authorities recently to release bank funds for lending may not help the real estate industry according to Macquarie Research. The tight situation will last for some more months because of the difficulty in raising capital. They do not feel the loosening up of bank funds for lending will solve the problem for real estate players as it is not probable that banks will look at them as borrowers of choice in the existing environment. Until the interest rates see a long term correction people will refrain from buying and some demand will revive only after the easing of interest rates.

Home purchases have become unaffordable for middle income purchasers because of steep unit prices with mortgage rates staying near peak levels and being unlikely to reduce early. According to the estimation of a domestic brokerage the rise in mortgage rates has sent up monthly payments for home-buyers by a quarter in comparison to 2005 levels.

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