By Manoj Nagpal, CEO Outlook Asia Capital
On January 2, 2017, one of my friends called me in excitement. “SBI has reduced the home loan rates to 8%. Seems HDFC is just fleecing me still at 9.75%. How do I shift my home loan?” There are some inherent fallacies here and let’s see what really happened to home loan rates and what should be your next steps to benefit from the current cuts in lending rates.
Banks now follow a MCLR (marginal cost of fund-based lending rate) model whereas HFCs (housing-finance companies) continue on the PLR (prime-lending rate) model. The MCLR is the benchmark rate below which a bank cannot lend and is calculated based on a prescribed formula based of four variables (a) marginal cost of funds (b) operating cost (c) tenure premium and (d) negative CRR-carry cost.
MCLR replaced the earlier base rate system, which, in turn, had replaced the PLR in banks. The objective of these shifts by the regulator (RBI) has been to move to a more transparent, quantitative and market-determined rates. Thus MCLR is a more dynamic model reflecting the incremental cost of funds and changes on a monthly basis. All new home loans taken from a bank with effect from April 2016 are on MCLR. But prior home loans would be on base rate or the PLR, which will be slower (read ‘very slow’) to react to changes in the interest rates. Home loans from HFCs like HDFC still work on the PLR model.
Due to the formula system of MCLR, SBI had to cut its MCLR from January 1, 2017, from 8.9% to 8%. SBI did not pass on this entire reduction of 90 bps to customers. Concurrently, it increased the margin on top of MCLR. Thus new home loan rates fell by around 50 bps and now will be in the range of 8.6%-9.1% depending on the ticket size and type of loan.
Being on an MCLR system provides home-loan customers with a more dynamic interest rate environment and is beneficial to customers. When one takes a home loan linked to MCLR, one should remember that the interest rate changes only on a pre-determined reset date. Between two reset dates, an MCLR home loan works like a fixed rate loan oblivious to any changes in the MCLR. RBI allows banks to have a reset period up to a maximum of one year.
For example, SBI has a reset period of one year, whereas HSBC has a reset period of 3 months. Thus a home loan customer who had taken a loan from SBI in Dec 2016 say at 9.3%, will not have any benefit of the current reduction in interest rates till December 2017, but new customers will be eligible for lower rates. Ideally one should choose a lower reset period to have a truly floating home loan.
What happens if you are on base rate or PLR model. Either you should move over to the MCLR model (which is a mandated option you have, though your bank may charge you for it) or wait for the base rate/PLR to come down.
SBI in the past 15 months has reduced its base rate by 5bps and the MCLR in the last nine months has reduced by 1.2% showing the reluctance of banks to cut base rates and thus not passing on the benefits of lower rates to existing customers. With the current reduction in MCLR, this may be the best time to re-negotiate and switch your loan over to the MCLR system. If you are with an HFC like HDFC, you could negotiate with your home-loan provider to shift your interest rates down to the prevailing market rates or shift over to a bank on the MCLR system. Every day of delay costs you money lost in higher interest
Under Construction Flat Booking Finds Tax Deduction Under Time Constraints
If a buyer makes a transaction to book an under-construction flat and if he acquires it within the three-year period of the sale of his old house, then he is entitled to a tax deduction, says a ruling from the Mumbai bench of the Income-tax Appellate Tribunal (ITAT). If an apartment is booked in an under construction project than it must be viewed as a method of constructing residential tenements, says the December 18 judgment.
That means if the buyer uses the entire gain from the transaction to buy another house within two years or construct another house within three years. The two- and three-year period applies even if the buyer bought another house a year before selling the first one. But the property should have been bought in the name of the seller.
It is mandatory that within a period of two years after or one year before the date of transfer of old house, the taxpayer should construct a residential house or acquire another residential house within a period of three years from the date of transfer of the old house. The date of receipt of compensation will determine the period of acquisition or construction in a case of compulsory acquisition.
This exemption is effective and can only be claimed in respect of one residential house property purchased/constructed in India. In the case of multiple house purchases or constructions, the exemption under section 54 will be available in respect of one house only. Any purchases made outside the country does not fall under any kind of exemption. Section 54 gives relaxation in such cases by providing relief to the taxpayer who sells his residential house and acquires another residential house from the gained capital.
After the sale of an asset, the difference between the buying price and the selling price is a capital gain or a capital loss. These are further classified as long-term or short-term. If a property is held for 24 months or less, with effective from 2017-18, then that asset is treated as Short Term Capital Asset. Then an investor can make
treated as Long Term Capital Asset. Then only a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL) can be made on that investment.
ITAT agreed that booking of a new flat in an under-construction apartment should be considered as a case of “construction” and not “purchase”, hence following the earlier decisions of the Bombay high court and the tribunal itself. Further ITAT allowed the fact that the construction can began prior to the date of sale of the old asset. Same was stated in the earlier judicial decisions of the Karnataka high court and Ahmedabad ITAT, that the date of commencement is not relevant but it is the completion of construction that comes in relevance to section 54.
HDFC and Quikr Make A Deal
According to a deal between HDFC and Quikr, a stake of more than 3 percent will be given to the mortgage giant in return to its transfer of offline and online real estate brokerage business to the classified ads platform.
After acquiring Commonfloor in 2016 Quikr already has a major presence in online real estate broking.
“Most of the searches for real estate are moving online. Quikr has a much bigger presence online. Through this deal, we are partnering Quikr in the broking business,” said HDFC MD Renu Sud Karnad. According to her, this deal will strengthen Quirks position with offline support.
The deal suggests that HDFC will transfer to Quikr its entire shareholding in HDFC Realty, a real estate brokerage platform, and HDFC Developers, which runs the HDFC RED online platform.
Karnad added that the deal expects Quikr to generate home loan leads for HDFC. The transaction consists of a co-branded alliance between both parties and the HDFC brand will continue to be used online for a year.
The e-real estate classifieds platform HDFC RED has around 7,000 project listings and generates traffic of over 80,000 unique visitors per month. HDFC Realty has a 300-member, in-house sales team, and 7,000-strong nationwide broker network. Avendus Capital was the exclusive financial adviser to Quikr while Kotak Investment Banking acted as the exclusive financial adviser to HDFC on this.
30 million monthly users make Quikr India’s largest classifieds platform. It runs multiple vertical businesses across real estate, automobiles, jobs, services, and goods. The Quikr Home, its real estate vertical generates 3.5 million monthly unique visitors.
Both companies intend to work closely and conduct analytics and identify potential homebuyers, and therefore home loan customers, early in their home-buying journey. Quikr founder and CEO Pranay Chulet said, “We see great synergies between Quikr and HDFC as we start working together to bring a seamless online-to-offline platform to developers and consumers.”
Retaining The Sustainability: GRIHA Launches Star Rating For Urban Homes
Green Rating for Integrated Habitat Assessment (GRIHA), is the National Rating System of India, a Sanskrit word meaning – ‘Abode’. Human architecture has always consumed resources in the form of energy, water and material from the environment. From their construction to operation, these habitats absorb the resources throughout their life cycles, emitting wastes in the end. This emission could be direct in the form of municipal wastes or indirect emission into the atmosphere, such as from electricity generation. Hence GRIHA was formed to reduce an architecture’s resource consumption, waste production and overall environment impact up to certain national acceptable limits.
In attempt to quantify all these aspects, like energy consumption, waste generation etc. GRIHA tries to manage, control and bring down the respective to the best possible limit. Being a rating tool, it helps people to assess the performance of their respective projects against the national benchmarks.
Hence it becomes an evaluation of the environmental performance of an architecture on a holistic level. Covering its entire life cycle, this evaluation provides a specific standard for a ‘green building’. This rating system aims to strike a balance between established institutions and emerging concepts, on a national as well as the international level.
The process starts with an online submission of documents according to the criteria. Then a team of professionals and experts from GRIHA Secretariat takes a site visit for the evaluation of the building. There are four different sections categorized by 34 criteria in GRIHA rating system. Some of them are site selection and site planning, conservation and efficient utilization of resources, building operation and maintenance, and innovation.
Sanjay Seth, CEO, Green Rating for Integrated Habitat Assessment (GRIHA) Council says, “A rating between one and five stars is being provided, helping the costumers to know about the sustainability of the houses”.
According to the Union Minister, Hardeep Singh Puri, the climate resilient and sustainable buildings are the need of the hour. As the government is aiming to construct around 1.2 crore houses for the urban poor under the affordable housing scheme.
In one of his keynote addresses, Andreas Baum, Ambassador of Switzerland to India and Bhutan said that the Indo Swiss collaboration is operating with the Indian Bureau of Energy Efficiency in the development of guidelines for energy efficient housing.
“At present India is witnessing a rapid urbanisation, if each building becomes greener than the last one, then we have a huge opportunity and hope for our country. We need to look beyond the conventional methods of building, in order to provide our citizens with a good quality of life. Hence, GRIHA gains important in meeting our national goals with respect to a sustainable society”, says Dr Ajay Mathur, director general, TERI & president, GRIHA Council.
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