Pressure on Home Buyers

If you have been saving for your dream house, you will need to build a bigger corpus before you start looking for a property.

The Reserve Bank of India (RBI) has asked banks to exclude stamp duty, registration and other documentation charges from the total value of the home forcalculating the maximum amount of loan that can be disbursed for property.

In order to stop banks from taking excessive risk, the RBI has restricted banks from lending more than 90 per cent for houses below Rs 20 lakh and 80 per cent for houses above Rs 20 lakh.

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“Some banks include stamp duty, registration and other documentation charges in the cost of the house. This overstates the realisable value of the property as stamp duty, registration and other documentation charges are not realisable and, consequently, the margin stipulated gets diluted. Accordingly, banks should not include these charges in the cost of the housing property they finance so that the effectiveness of loan-to-value norms is not diluted,” the RBI said in a notification.

“This is a damaging decision. It will reduce the buying capacity of the purchaser due to which demand will slow down,” says Rajesh Goyal, chief executive of RG Group, a Delhi-based developer.

However, not everyone is worried about the revised norms on home loans.

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“In the short term, the RBIs move may lead to a slight reduction in home sales. However, buyers will be reconciled to it in the medium to long term. The added expense is still an investment into a high-value asset, and the home loan burden reduces proportionately,” says Om Ahuja, chief executive, residential services, Jones Lang LaSalle India, a property consultancy.

“Land costs, which comprises 70-80 per cent of the total cost of a property in large cities, are a bigger problem.”

Industry players are eagerly waiting for the Union Budget 2012. The finance ministry’s proposal to double the annual tax deduction limit on interest on home loans from Rs 1.5 lakh to Rs 3 lakh is being applauded by the industry. Home sales have slowed over the past few quarters, mainly due to rising property prices.

“Increasing the limit of tax exemption for home loan repayments will open up the demand which actually exists,” says Om Chaudhry, founder and chief executive of real estate private equity FIRE Capital, and chairman of residential developer Astrum Homes.