Moving into one’s own home is a joy, which is to be felt not explained. It is utopia what with the poojas, house warming functions, searching for just the right furniture and fittings, praises you get for having taken care of the finer parts in construction and decorating the house and the pride in having acquired a physical symbol of success.

After the festivities are over, and with the dawn of a new month, a new realization comes home. For the fortunate few, it is the reminder to fund your bank account, as the loan EMI is due after a week. For others the money simply flew out of the bank account.

It is time for us to act like the fund manager of a mutual fund or investment fund. Taking informed decisions to manage the asset that we call home and the liability that we call housing loan. By being prudent, you can get high “returns” in the form of saving on interest outflow.

Fund Management When Carrying a Home Loan

As a fund manager of the house, one has to find ways to maximize the benefits of the cash flows. Make a list of all the loans and savings/investments that you have made. Do you find places where the savings/investment is giving lesser returns than the loan rates? This can typically be seen with your endowment insurance plans, your EPF and PPF, the postal deposits, sometimes-even ULIPs. Why should you be invested in something when you are paying higher interest to somebody else? It is better to close all or most of these lesser returns savings/investments and divert the funds to close the home loan.

Care should however be taken to replace an endowment insurance plan with a term plan of higher cover. Your employer and your EPF officer will allow withdrawal of funds from the EPF account for buying and closing the loan of a house. The PPF is not so flexible with letting go of your money. ULIPs and the postal deposits can be closed only after the stipulated 3 years of lock-in.

Ways to repay your debt quickly:

There are ways to come out of the EMIs and make your loan tenure shorter:

1.    Partial pre-payment

2.    Switching to a lower rate

3.    Increasing the EMI

Now let us look at the options in more detail. The best part is that, the options do not in any way add to your existing budget.

Partial Pre-Payment

This is the easiest way to close a housing loan faster. The method is to make use of any one-time income like a bonus, salary arrears, gifts from friends/relatives, any wind fall gains from shares, property sold, deposits closed, tax saving investments maturing, closure of savings that are giving you lesser returns than the housing loan, etc to partially close the housing loan.

The effect is that the one-time payments help to reduce the principal balance in the loan. And when the EMIs continue, they have lesser of the principal to cover. So the same EMIs need a lesser time to close the loan. More earlier and more frequently the partial pre-payments happen the faster the loans close.

Banks generally allow partial pre-payment starting from Rs.10,000/-. There are no charges for partial pre-payment of housing loans.

Switching To a Lower Rate

The interest rates current are in a rising trend. There are times when the interest rates start going down too. Based on the interest rate reset period, different banks will reduce their rates at different times. If the reset interest band of your lender is a wider band, you may be at a higher interest rate for a long time after other banks have started to reduce their rates.

Switching to a lower interest rate will shave off a few years from your housing loan. Care however has to be taken about not jumping too many times or with low interest rate differences. This is because there is a charge for switching loans, i.e. prepayment penalty, which the RBI has been stressing, should be removed from the system. While some banks have already done away with it, some still charge if you do not pay from your own sources. However, it could just be a matter of time till it is totally removed from the system easing the cost burden for the loan borrower further!

Do remember that property verification and other legal paperwork will have to be done afresh in the case of a loan transfer. Also, for a loan transfer to be effective you should have a clear track of having cleared all the EMIs on time, every time.

Increasing the EMIe

This is another option to close the loan faster. If you can spare a portion of an increment to increase the EMI, considerable saving could be made. For example a Rs.30,00,000/- loan for 20 years will need an EMI of Rs.28,950/-. If you can spare an additional Rs.2,300/- per month, the loan can be closed in 15 years itself.

The EMI can also be increased by making use of money that was going into an endowment insurance plan or a recurring deposit in a post office.

Increasing the EMI can be done at any point during the tenure of the loan. There are generally no charges for increasing the EMI.

Summary

Only after closing the home loan does one really become the owner of the house. Closing the loan as soon as possible not only relieves the mental strain of carrying a debt but also releases more money into the family budget.

Buying a home is unlike buying any other item. First, this is possibly the most expensive purchase for us and secondly, the pricing structure includes many components thus making it complex to understand. Most of the time, home buyers take a loan to purchase a home and pay EMI for the next 10-20 years. Essentially buying a home can cost a major part of the savings for middle class.

Hence it is important to know what we are paying for. If home buyers are going to spend 30-60 lakhs within a few weeks on home search, selection, and purchase, they should know the pricing structure of their dream home. This will help them understand the cost structure better as well as set the right expectation on future investments. There are three types of cost that home buyers pay. Let’s look at them in detail.

Transaction Cost:

Transaction costs are components of total price that the buyer pays for the transfer of property from seller to his or her name. The components are duties, fees, and any other charges applicable in order to transfer the property. Transaction cost is the significant part of the total cost at almost 10% to 20%.

Transaction cost consists of two major components; statutory fee and professional fee. The statutory fee includes the following components

Ø  Stamp duty

Ø  Registration charges

Ø  Land conversion charges

Ø  Transfer & mutation charges, and

Ø  Others

The professional charges comprise of the following

Ø  Brokerage

Ø  Documentation preparation charges

Ø  Due diligence

Ø  Society transfer fees, and

Ø  Others

Finance Cost:

Finance cost is the cost incurred for obtaining finance from the Banks, HFCs or NBFCs. Finance cost includes the following:

Ø  Processing fee to the financial institutions

Ø  Documentation fee

Essentially finance cost includes all the costs that buyers incur for the purpose of getting a loan to buy the house. If the buyer is buying a house with upfront cash payment from his savings, finance cost will be zero. This is a very small part of the total cost usually not exceeding 1%.

Cost of property:

The last but most important cost component is the cost of property. This includes the following:

Ø  Cost of land

Ø  Cost of construction of home

Ø  Any other development charges that have occurred in developing and maintaining the property

Cost of property is the largest cost comprising 80%-90% of the total cost.

Important points

The same cost structure is applicable to rural and urban areas. The proportion of various costs may vary to some extent depending on population of the area but largely remain the same.

Transaction and financing costs depend on the age of the properties that the home buyer is going to acquire. Typically relatively new properties incur high transaction and financing cost than older properties.

Transaction costs can differ in few cases. Since it is usually higher in new properties, many banks have in-house brokers who can assist potential home buyers in locating their home. These in-house brokers are relatively cheaper. However, home buyers must check the credentials of the broker.

Finance cost varies widely across banks and lenders. Though the proportion of finance charges are much less than that of transaction costs and cost of property, buyers should check this too with different banks. Even if you are able to save only a few thousands, you are still better off.

Transaction through brokers or property developers can be a little expensive than transaction through banks or housing finance companies. The reason is simple. The brokers will charge his or her fee too.

Each cost component has several components under them. Home buyers should check each of the components and the amount of charges against them. They should not assume that the property builder has been charging the market rate.

Home buyers are always looking for the best home they can buy with the resources and time available with them. Now, more than ever, real estate prices are subdued and buyers are again active in the market.

Buying a home is the most exciting and at the same time, tedious task for people. While the excitement of owning your own home pushes you harder to expedite the process, the tedious task of going through enormous amount of details frustrates you. Going through the process is a necessity. Though the process is tedious and demanding, any negligence on the due diligence can cost us big in the future.

In this article, we will take a look at some options that home buyers have and how they can choose the best one based on their requirement.

Buying an under-construction home

This is the most popular way of buying a home. A builder announces a new housing complex through newspapers, TV, or any other media. Agents start going around the market, companies, malls, and even homes of people to advertise the same. The goal of the builder is to sell as many as possible before the housing complex is built. In fact more than 75% of the flats of known builders are booked even before a brick is laid.

The advantage

Cheaper – Buying an under-construction home is cheaper compared to buying the one that is already built or about to be built. The cost difference is significant. In the Delhi and NCR region, a ready to move flat with 2 bedrooms that costs home buyers about 40-50 lakhs can be bought anywhere in the range of 30-40 lakhs while under-construction, depending on the location. On an average, the difference is anywhere between 20% and 40%. This is a big difference for majority of the home buyers.

Low EMI – The EMI is paid as the work progresses hence the initial EMIs are low in the case of an under construction home.

Win-win situation for buyers and sellers – Buying an under construction home is a win-win situation for both buyer and seller. The seller gets a ready set of customers even before he starts laying the foundation while buyers get the cost benefit.

High returns – Since the prices are lower, you may get higher returns on the under-construction home. This kind of return is not possible in a ready to move home. However, high returns come with high risks. To give an example, people who invested in Noida authority plots earned high returns while people who invested in Samshabaad in Hyderabad are still waiting for the area to pick up.

Caution Points

Risk is high – All is not so well in under construction home buying though. There have been cases where builders could not complete the housing complex and buyers lost the money. Real estate sector is full of such stories where the builders could not complete the property because of cash crunch, high interest rate, and high raw material costs.

On the other hand, the market outlook may also change like how it happened in Samshabaad in Hyderabad. Samshabaad was supposed to host the largest Infosys campus, a chip factory, few engineering & medical colleges, banks etc. but none of it happened due to the 2008 crisis.

Many times, you don’t get what you are promised – This is another common complaint the home buyers have. They usually do not get what was promised in the documents. What is distressing is the carpet area that buyers get once the home is constructed. The carpet area is usually 70% of the super built area. The illusory swimming pool may never come up.

Important Points for buyers of under construction homes

Buyers should also check the past history of the builder. If the builder has done great in the past, chances are very high that he will repeat the same. However, if the past is checkered, rest assured history will repeat itself. Hence the track record of the builder is of paramount importance.

Buyers should clarify loan tenure and how the money will be released to the builder. Typically it is completion based.

Buying a ready to move home

A new trend is observed in home buying since the last couple of months. A good number of home buyers are slowly shifting towards moving to `ready to move’ homes than buy an under construction home and wait for a couple of years to get the possession. The reason is not hard to guess. Since the economic slowdown in 2008, there have been many cases where builders could not complete the housing complex and buyers had to wait helplessly. There have been many such cases.

The advantage

Immediately Available – Investors do not have to wait to move to their new home as it is ready and all buyers have to do is to pay the money, sign necessary documents, get all titles and required documents and transport their baggage to the new home.

Either EMI or Rent but not both – In the case of ready to move, you just pay the EMI. In case of buying under construction home, you have to pay the EMI and live in rented apartment till you get the possession.

You get what you see – In the ready to move home, you get what you see. Since the housing complex is ready and there are people living there, getting feedback about the area, maintenance, locality, shopping centers, and utility centers become easy.

Caution Points

The biggest negative of ready to move home is that you will have no idea of what went on behind the scenes, i.e. in terms of materials used, in terms of strength of the foundation etc. If the maintenance is shabby, the house can start to look old in no time!

Also, the price of ready to move home is about 25% higher than the price of under-construction home.

Important Points

Ready to move homes are generally more expensive but do not take this as gospel. Do your research; speak with a few people in the locality to find out the fair value of the home.

Group Buying

Since the last couple of months, many new companies such as www.groupbookings.in have encouraged home buyers to form a group and thus increase their bargaining power. Once the group is fairly big, the group buying companies will negotiate with builders on their behalf and get extra discounts. Essentially these companies act as a mediator between the builders and home buyers.  For builders, giving extra discounts is not a problem because they are saving big in advertisement and sales force.

The Advantage

Group buying empowers home buyers to negotiate better with the builder. The group home buyers usually get a better discount than what they can get individually.

Caution Points

In group buying, an individual buyer doesn’t make much difference and hence group’s interest takes priority over individual’s choice.

The down payment usually is higher.

Important Points

The buyers should study the documents carefully. Don’t assume that someone is reading these documents. You will be surprised to know that everyone has the same assumptions.

Group buying of homes take time and hence you have to be patient about it. The group buying company has to build the group, and negotiate the price with the builder for additional discounts. These activities take time.

Buying run-down homes

This option is not yet popular in India but slowly picking up. Essentially buyers choose to buy a rundown home at dirt cheap prices.  Once the house is yours, you can fix it and spend some money to get it up to date. This can fetch a better value in the market and the investor can make a killing in profit.

The Advantage

The houses are much cheaper even when you add the cost of repairing the house. Run-down houses are generally row houses and hence you get the land with it too.

Caution Points

The look of run down houses can be deceptive. You may have thought how must it should cost to renew but when you start to repair it, it may exceed your cost estimation.

Important Points

Unless you have experience about this field, do not venture into it. You may end up buying a worthless property in an area where people are migrating from.

What should you choose?

Your choice should depend upon your financial condition, timing, and your choice of location. Location is the most important factor in real estate.

If you are ready to wait, can take medium to high risk, and do not care much for location (in terms of being near to the market etc.), you can go for booking an under-construction home. You can even go for group booking if your requirement is to stay with people of your social standing.

If you cannot wait and cannot take high risks associated with under-construction homes and need to be near  amenities of your choice, try to find a ready to move home or go for a group buy.

When we talk about credit card usage we find different people managing it in a different way. Some people are highly disciplined and never default on their monthly installments and others are so messy that they are always on the top of the defaulter list. Managing finance is a complex task and it’s very easy to fall into a debt trap if you misuse the power of free credit. Credit card provides you the power but it never suggests that this power is unlimited. You have to pay the dues back at the end of the free credit period but somehow the human mind doesn’t listen. To avoid getting into trouble in future it’s advisable to understand your credit personality and choose the credit card which suits you the best. Credit card companies provide credit cards with different features like different interest rate, different reward structure, different credit limits etc. If you understand the way you deal with credit it gets easier to choose the best combination for you. Let’s see what kinds of credit personalities exist and what card they should opt for.

The Beginner

You are just out of college enjoying your first job. You never had surplus money and hence no financial planning was required. You have never used credit previously and find the concept amazing. As expected, you are in a hurry to apply for one.

For beginners it’s advisable not to go for cards with high credit limits. You still do not know how you are going to use your card. Your financial wit has never been tested so better be cautious. This is just the beginning and once you are sure that you can manage your finances well, you can opt for credit cards with a higher limit.

The Disciplined

You have been there and done it all. You are great at financial planning and almost everything is in perfect shape. You never default on your monthly payments and never spend beyond your means. Reward offers don’t alter your spending pattern and you plan every move before executing.

For the disciplined the best suited card is one with cash back facility and good reward structure. The reward points should accrue irrespective of the type of purchasing done and can be redeemed at one go. Interest rate on your card doesn’t matter much as you always pay on time.

The Carefree

You love spending and believe that spending is the motivation for earning. You plan things beforehand but don’t mind going overboard at times. You cross your spending limit at times so you don’t make full payments on your credit card.

The most important feature which the carefree should look for in a credit card is the interest rate. As you carry forward the balance your interest expense is going to be high. It’s advisable to choose the card which offers the lowest interest rate. You should also make sure that your card does not have any annual maintenance charges attached to it.

The complete mess

You don’t understand financial management. Almost every time you do not even pay the minimum amount due on your credit card. All the customer care executives of the bank know you by name and are in constant touch with you. You always end up paying heavy interest and late payment charges.

For the messy it is better to use prepaid cards as it will save a great deal of money which you pay in the form of interest and various charges. This will prevent you from spending beyond your means.

The Credit Fearing

You never wanted a credit card in the first place. According to you being in debt is a crime. You applied for the card just because it made your life easy in some scenarios like booking air tickets and overseas purchases. You only swipe it in some kind of emergency and it goes unused at times for months.

The best card which will suit your needs is the one with no annual maintenance charge. You never make late payments and you are not a frequent user so interest rate and reward structure of the card doesn’t matter much for you.

Conclusion

There are a wide variety of credit cards available in the market and it’s not possible to research all of them. The better approach in such a scenario is to research your personality and then research the cards available. While you define your personality you get to know the basic traits your card should have. Once you are sure about the traits the list of cards automatically gets shorter. The best approach is to talk to the bank and discuss with the executive regarding your needs and spending behavior. They will definitely guide you with better options as banks are getting more and more cautious about their relationship with the customer. The existing competition in the market compels them to give better services to their clients. Rather than doing the entire math yourself, put forth some direct questions to them, which will help you make the best decision.

Sometime ago, the competition commission of India (CCI) imposed a penalty of Rs. 630 crores on the largest real estate company of India, the DLF. This was hailed as a landmark judgement. CCI is an institution created to ensure that no institution or company exploits its dominant position to create a monopolistic situation in the market by unfair means. CCI has taken a serious stand against DLF and termed the violation as the “grossly abusing its dominant position”.

What was the issue?

There have been complaints against real estate developers over the last couple of years on incomplete projects, delays in possession, and in some cases, irresponsible responses to critical situations. This has left home buyers confused and exasperated. Some of the affected home buyers lodged a complaint with CCI regarding a project undertaken by DLF. The project was supposed to be completed in 2009 but even after 2 years past the stipulated timeline of 2009, the status was not clarified according to the home buyers.

The second deviation that buyers indicated was that of DLF indulging in increasing the number of floors. This has resulted in more number of apartments in the same area. This is very common to many developers who promise something but deliver a completely different product.

Apart from these violations, there were many terms and conditions, which were unfair to the home buyers. For example, buyers will have to pay a high interest rate if buyers delay payment while DLF will pay a negligible amount if they delay possession. This condition is termed the punitive penalty clause by builders.

What this means is that if the buyer delays the payment they will have to pay with an interest rate. For example, if the buyer is supposed to pay 1L by December 28^th, 2011 and delays, he will have to pay 15% charges per annum on this amount. While if the builder delays giving possession of apartment, he doesn’t pay much penalty.

The CCI, in its judgement, has also clarified that they can issue penalties against other developers if found guilty on similar violations. This has opened up other cases as well and CCI is actively looking into such cases.

Implication for home buyers

This significant judgement by CCI will have larger implications for the home buyers. DLF, in its response, said that these are industry practices and hence they cannot be singled out. Essentially what this means is that the judgement can be used by home buyers who have been forced into similar situations by other builders.

Home buyers can go to CCI for situations where builders have increased the number of apartments than what is promised originally. They can also question the builders on changing the super area and charging extra.

Home buyers can question the exit clauses for them and for the builders. The exit clause is usually not in favour of the home buyers. In the case of DLF, the exit clause gave unprecedented right to DLF to exit without providing adequate compensation to the home buyers. Not only this, buyers can question changing any clause which puts them at an unfair disadvantage.

What is next?

After this judgement, CCI has been studying other cases where such violations have happened. Since DLF has made it clear that these are industry practices, CCI is conducting a thorough check on builders who follow the same practice. This will provide relief to home buyers who have not got their units as promised.

There is another regulation to be discussed in the parliament very soon. The real estate authority bill envisages far-sweeping changes in the real estate industry. This regulation will enforce transparency in real estate dealing, reduce unaccounted for transactions, enforce accountability and sanctity of contract, and ensure that home buyers are not taken for granted.

Together, with real estate authority bill CCI judgement against DLF will have a big impact in the realty segment. This will encourage serious players in real estate, discourage unscrupulous practices, and attract foreign players which will help the industry as a whole.

Government of India has outlined a plan to spend $1 trillion in next 10 years on infrastructure development. This development is needed because infrastructure needs to support and sustain the projected growth rate of Indian economy for next few decades. To fund this initiative, the Government is trying to tap the various sources at its disposal. Infrastructure bond is just one source where Government has given tax breaks for up to Rs 20,000 for individuals. This is to attract retail investment.

Infrastructure bond vis-à-vis other debt instruments

Infrastructure bond is widely welcomed by salaried individuals who have been demanding to increase the tax break from 1 lakh. It has given them another avenue to invest for tax saving purpose. Let’s take a look at other investments that are available and provide a fixed income.

Debt oriented mutual funds

The other debt instruments available for investment are debt oriented mutual funds. These funds allocate major part of the fund in Government securities, corporate bonds and debentures, and sometimes in fixed deposit. They can be a good alternative. However, even though they are debt oriented funds, a small part (up to 30%) goes towards equity. Hence investors do see fluctuation in returns. The average returns from debt oriented funds over a period of time can be about 12% depending upon the market condition and proportion of fund invested in equity.

Bank fixed deposit

The other option is banks where the rates of interest have gone up. Few banks are giving good returns on fixed deposits. For example, bank of Baroda is giving 10% returns on fixed deposit. This is certainly better returns in absolute term. The post-tax returns will be about 7%. There are other banks which are offering similar rates on fixed deposits.

Corporate fixed deposit

Then there are fixed deposits offered by blue chip companies. These are highly rated debt instruments. For example, Mahindra Finance or Tata Motors deposits are two prominent offers that offer 10.25% returns. Mahindra fixed deposit scheme is rated FAAA, the highest rating. The payment is done quarterly. There are other firms which offer even better returns but those firms rated lower. Investors should consider these alternatives too.

Fixed maturity plan

There are mutual funds, also known as, fixed maturity plans (FMP). They are as good as fixed deposits and offer an “expected” return of 9% to 10% . We use “expected” because there is always the risk of corporate default (though it rarely happens).

Hence all the options look better till you consider the tax advantage that the infrastructure fund provides you. Tax advantage is the biggest advantage that infra bonds provide. The interest received on infra bond is taxable though.

Investors’ response

Infrastructure bond has seen tremendous response from retail investors for tax saving purpose. The demand goes up before the end of the financial year. Even though it is a big hit among salaried individuals and retail investors, it did not impress big ticket investors in India and abroad much because they are more focused on getting better returns than saving tax.

To encourage response from FII, Government is planning to reduce the lock in period of infra bonds. The lock in period currently is 5 years. In all probability, this may come down to 1 year. The reduced lock in period may be able to bring foreign capital for infrastructure projects which are delayed because of lack of funds.

Ideally, reducing the lock in period should bring more investors, both domestic and multinational. This seems to be a good way to increase participation and transaction. However, the downside of this is that it will increase speculative investment.

Retail investors anyway invest in infra bonds to save taxes and hence there isn’t much scope left in retail segment.

Important points to keep in mind

First, you must invest in infra bonds because you will save taxes. There is no other way you can save taxes on Rs 20,000 extra. Do not invest more than Rs 20,000 as the tax benefit is limited to just Rs 20,000. Any investment beyond this will be taxed as usual. The disadvantage of infra bonds is the lock in period and the taxable interest.

Second, look at the rating assigned by rating agencies before investing in infra bonds. All bond issuers have to go through rating process before they can raise debt. A high rating such as AAA or even AA is good and implies the capability of the company to pay the interest and principal.

Finally, understand the risk associated with bond investment. While the nature of fixed return looks risk free, it exposes the investors to interest rate risk and inflation risk. Inflation at the rate of 10% will essentially give you negative returns on a bond that offers 9% returns.

Building your own independent home is a dream that many of us want to do. The thrill of owning your own piece of land, building a structure as per your requirements, and helping design the architecture with your architecture friend sounds very attractive. Of course it goes without saying that a lot of painstaking work needs to be accomplished to make this dream a reality.

Building your dream home consists of two major steps. The first is acquiring the land in a good locality and second is getting the contractor and building the house. Both steps require due diligence on exhaustive details and careful planning.

Buying the land

Buying land is the first step. The individual has to find out a good locality to acquire land to build his or her house. While finding the right locality is a tough task, the tougher task is clear documentation. Let’s look at some of the important points users need to focus on while buying a piece of land.

Title deed – Title deed is a document which details the owner name of the property. Make sure that you have gone through the title deed with a trusted lawyer and the deed is clear. You must get the original deed for study.

Encumbrance certificate – You should ask for encumbrance certificate preferably for the last 30 years. This certifies that the property is not under any legal dispute.

Ownership structure – You should look at the ownership structure of the property. If this is owned by 2 or more people, make sure that all of them have cleared the transaction.

Building the house

While building an independent house can be a very exciting and satisfying experience, you should keep important points in mind.

Gather information – This is the most important step. Home owner should do maximum research on the subject. The cost of building home varies widely depending on locality, raw materials, structure, and design of the house. You should also track prices of raw materials, labours, and design artefacts.

Find the fair rate of building a house – Find out the fair price for building a house. This can be in Rs per square feet. For example, in an area like Hyderabad, construction may cost anywhere between Rs 500 to Rs 1500 per square feet. Know the right cost for your type of house. Remember if you overpay Rs 200 per square feet, you are spending 6 lakhs more for building a house of 3000 square feet.

Select the contractor – Selecting a good contractor is the most important task in the whole project. A contractor is like a project manager. Take quotes from various contractors and compare the overall service. Price is just a part of the complete end to end services provided by the contractor. You should look at the past records of the contractor, some structures built by him or her, quality of materials supplied by him, any reference that you can dig out from your contacts. If the contractor is building a structure currently, visit the site and take a look around. You may get a fair idea about the quality of work, materials management, and resources utilization just by looking around the site and observing the labourers working on the site.

Be actively involved in the construction activity – For you it’s the house you are planning to reside in for a lifetime, for the builder it is just another project. So take care to be involved and ensure things like the proper size and structure of the foundation is right, all the structural components are designed properly etc. otherwise it is impossible to change them when that particular stage of construction is complete.

Supervise and track the expenses – This is extremely important. Remember that building a house takes a huge amount of money. Even a difference of 10% to 20% is going to weigh heavily on your pocket. Ask questions on amount of cement, steel, timelines, and resources required for completing the work.

Complete the work on time – The cost of delays in construction is very high. Delays cost you in two ways. It postpones the possession and hence your rental expenses continue. Second, delays always require some work to be redone before it starts again. In this situation, it is also important to understand the seasonal factor that impacts the availability of labour. Typically, during the festive season, most of the labourers head back for their home state. The labourers invariably take more leave than you want them to take. This hampers your progress. Hence you should factor this while planning for constructing your home.

Finally

Building your own home is certainly a daunting task. It requires dedication, due diligence, meticulous planning and tracking of costs, and being aware of the changing prices of raw materials. However, once you complete your work and walk into your dream home, it is worth all that effort!

Exercising discipline is extremely important in every aspect of life. This cannot be more stressed in the case of managing your money. The manner in which you manage your expenses is the key to reduce liabilities and save more. According to a famous trading and investing legend- One must not spend time looking for the Holy Grail of investments or trading systems. It doesn’t exist. The Holy Grail is within you. It’s not the investment that’s going to determine success or failure rather it’s the discipline of the investor.

There are 2 friends Mr. X and Mr. Y both in their late 20s. Mr. X has a monthly income of Rs. 60,000, while Mr. Y has a salary of Rs 40,000 per month.  However, Mr. X’s job is more stressful and demanding; while Mr. Y has a comfortable job with low stress levels and better work life balance.

Mr. X lives a lavish life. He spends most of his salary; saves inconsistently. On the other hand Mr. Y is very regular in savings. From his monthly income, he saves Rs 15,000 a month in the following investment options.

Pension - Rs 3,000; Child plans -  Rs 2,000; Mutual Funds -  Rs 4,000; Emergency fund -  Rs 1,000; Vacation fund -  Rs 1,000; PPF – Rs 2,000; Mediclaim-   Rs 2,000

Suppose at the age of 44 years, both have a medical emergency. Due to lack of savings Mr. X would be stumped. However, in case of Mr. Y, his saving patterns, as visible below, would be able to save the day and give him the ability to meet the sudden expense.

One can never predict life. It’s difficult to anticipate bad times. Hence, it is essential to save for such rainy days. One should make it a habit to save, even if it’s a small amount.

Here are some steps which one can follow.

Track expenses: This is the foremost step. You should keep a check on monthly expenses. Unnecessary expenses should be avoided. One way to know how much one spent for a month is by having a monthly budget. This will show where the money is spent and also regulate the cash flows. This done over a period of time will help you identify areas where there is room to cut back on spending and save money. This will free up cash, which can be used to pay up existing debts or help save for the rainy day. Reducing spending, as opposed to earning more money, is the real key to gaining control of finances. Also, you must ensure that some money is set aside to cover monthly expenses for at least three months. These funds should be set aside such that can be readily accessed in case in times of emergency or as a contingency fund.

Pay off debts/ credit card debts: Paying off your debts early is one of the best investments you can make, specially paying off debts which have a high rate of interest.  This includes the credit card payments which generally have higher interest costs.

Create discipline: You need to have discipline in the way you spend and control your expenditure. It is the key to save. A consistent plan of saving and investing helps attain one’s goal. With discipline and time one can reach goals.

Importance of saving: Here is a simple example. There are 2 friends, Mr. A and Mr. B. Mr. B saves Rs 500 per month. Mr. A saves nothing. Over the years, here’s what happens.

The discipline of saving regularly has helped Mr. B be richer by Rs 19, 931. Also what you earn is not as important as what you save. If you spend everything you earn in futile pursuits and wasteful expenditure, then there is no point to the amount earned.

Invest: Start the wealth building exercise by investing in low risk investments. Once the base is strong, then increase the risk exposure by investing in higher return investments. Also, do not put all the eggs in the same basket. Your risk tolerance level goes a long way in defining your investment approach. However, do remember your investment objectives before you subscribe to an investment plan.

Follow a systematic investment plan: Invest at regular times. By doing a SIP, you can SIP (sleep in peace). This will help you reduce the cost and earn higher returns in the long term.

As seen in the case of Mr. Y, by saving regularly helped him meet the medical emergency with ease. By following these simples steps, you can make your money last longer!

The year 2011 witnessed a high interest rate scenario, shrinking profit margins and soaring input costs for property developers in India. The economic slowdown added problems for property dealers, as the number of customers dwindled in 2011. Most of the developers had to put their expansion plans on hold, and their existing projects also faced a setback due to slow sales, resulting in a piling inventory.

In 2012 the realty market is expected to consolidate, and most of the developers are likely to focus on generating liquidity for better cash flow by selling their existing projects at a lower rate to tackle the stagnation in sales. The first priority for every developer would be to complete their existing projects to cut the capital involved for projects in progress. This situation would wash out players who just exist in a market to create competition against the genuine developers.

Now the question is what step a home buyer should take under such market conditions?

A person would be interested to purchase a property to either reside in it or to invest or both. In this article, we will focus on the various issues related to purchasing property for residential purpose. The current market condition has categorized residential property buyers into two categories, which are:

-          Existing Buyers: Those who have already put their money for buying a home but the possession is not received.

-          New Buyers: Those who are contemplating buying a home.

The state of existing buyers:

Due to the economic slowdown, there are lots of property buyers who have already paid for their homes, but the developers have delayed proving them possession. Due to lack of funds and rising input costs, developers have either stopped the project or restructured the plan by adding more homes under a project to bring liquidity and cost averaging.  If the buyer has included the penalty clause in the purchase agreement for delay in possession, then they can claim it immediately from the developers. The delay penalty safeguards a buyer by binding a developer to pay interest on the amount invested, if the possession is delayed for some reason.

However, it must be noted that the delay penalty may not depend on the prevailing interest rate in the market. This means that the existing customers who have not received the possession, have to pay home loan EMIs at current interest rate, which is at peak, whereas the delay penalties they obtain from the developers are at a lower interest rate as it has been agreed upon at an older interest rate when loans were cheaper. Existing buyers could be quite disappointed in such a scenario as they are losing possession as well as money!

What the new buyers can expect:

The new buyers have all their options open before they decide to buy a home. Though the market may not seem very attractive for an existing buyer for a new buyer it is a different story. This is a very good time to buy a home. Here is why:

-          The interest rate for home loans is at peak, and RBI has recently hinted a fall in coming days; so new buyers are likely to pay their EMIs in a falling interest rate scenario! Hence, the interest burden will be reduced significantly in such a situation.

-          Many buyers anticipate an interest rate drop and postpone their purchase decision, but it should be noted that, at present the developers are offering very attractive discounts as they need liquidity and are left with a huge inventory. If the interest rate falls, then this offer would not be available as the liquidity position would improve in the market.

-          As there is considerably less investor rush in the current market due to high borrowing cost, choices are aplenty!The buyer can customize his purchase of the home for its location, size, price and other important aspects due to sluggish market conditions.

-          Also, new buyers have the option of purchasing both from a developer and an existing buyer in the current market situation and better bargains can be struck.

Points to remember for the potential buyers

The new buyer should take a cautious approach while finalizing a home purchase bearing the following aspects in mind.

-          If the new buyer decides to buy a home in an ongoing project, then chances of delay in possession is always possibility so due diligence is very necessary.

-          To rule out the loss due to possession delay, the delay penalty must be incorporated in the agreement with the developer. Though the interest rate is expected to fall in coming days, the penalty should be based on a floating basis because in case the interest rate increases due to any unexpected event, then the delay penalty would also increase and protect the buyer from loss.

Let’s understand this with the help of an example:

Suppose a person “B” has decided to buy a home and raised a home loan at 10% p.a. The developer “S” promises to handover the possession of the house within two years or else agrees to pay a penalty at 1% lesser then the bank’s interest rate, i.e. penalty at 9%. B has two options, either to fix the penalty interest at 9% or keep it floating at 1 % lesser than the bank’s interest rate. If S defaults in giving possession after two years and delays for one extra year, then the following situations would arise:

Case I: Penalty fixed at some rate say at 9% p.a.

Suppose if the bank’s interest rate falls to 8% p.a., then S would pay penalty at 9% for a one year delay. Hence B would get the benefit of extra penalty over bank’s interest rate. However, if the bank’s interest increases to 12%, then also S would pay penalty at 9%, hence B would lose more against the bank’s interest rate. Hence, buyer has chances to gain as well as incurs the risk of loss in this situation.

Case II: Floating Penalty

Since S agreed to pay a penalty at a floating rate system it does not matter whether bank’s interest falls or increases because the penalty rate would be 1 % lesser in every scenario. Hence buyer would hedge his position against increase or decrease in interest rate.

-          If the buyer decides to buy a house from an existing buyer who owns a ready flat, then it is very important to check the encumbrances thoroughly. The other basic aspects such as electricity bill, telephone bill, and building society bill along with developers’ agreement should be checked properly before finalizing the deal.

-          The new buyer should select a floating rate system while applying for a loan and also negotiate with banks to waive the prepayment penalty charges for future. According to the RBI mandate prepayment penalty is expected to be done away with but do ensure if this is indeed the case as some banks might still be imposing it. Prepayment can be done either as a one-time payment or switching the loan to another bank with a lesser interest rate or even a partial prepayments over a period of time. The prepayment decision should be taken based on the remaining loan amount, term and the ease with which the funds can be arranged.

-          Many developers are compromising with the quality of construction materials due to high input costs, so the new buyers must check to verify such aspects before buying the house.

-          In the recent past, lots of hue and cry was made by developers and buyers in Delhi NCR due to court orders to stop construction on account of multiple land disputes. The new buyers must verify all the legal aspects before finalizing the deal. The contract with a developer should be verified properly to avoid fraudulent intentions. The buyer should always insist on the developers including the time binding clause to avoid excess delay in the project. If the project is delayed much beyond the promised time, then the buyer should not hesitate to knock the doors of the court. Recently, lots of cases have come into the picture where courts have provided relief to the buyers by ordering complete refund along with penalty against the developer.

Keeping in mind the various points discussed above in this article, an existing buyer should strive to make an early repayment of the loan, as many banks have waived the prepayment penalty. If the flat is under construction stages, then they can also opt for exiting the deal by reselling or canceling the agreement if possible to avoid loss due to uncertainty of project completion.  The new buyer has a good opportunity to buy a house at a discounted price and desired location. Proper due diligence and price negotiation are key aspects for the new buyer.

Note that knowledge of current personal net worth is essential to make financial decisions. It is important to reevaluate personal net worth while making any important financial decision as the value of assets and liabilities is likely to change. Also, net worth should not be considered in isolation. It is a good idea to consider factors like current and future income levels, future liabilities etc.

An accurate understanding of one’s financial well being is of utmost importance at every stage of life. So, whether you are a student, fresher into the job market or a veteran - assessment of personal financial health is important in order to make good financial decisions. For example, purchasing a car, purchasing a home, taking a student loan, liquidating an investment or making a risky investment  – all these decisions can be made only if you know your financial status well.

An individual’s financial health is computed by means of his personal net worth. In simple terms, personal net worth is the net asset value of an individual. Personal net worth is calculated as follows:

[Total Assets] less [Total Liabilities]

One must assess his / her net personal worth on a regular basis. This is because corrective measures can be taken in time if the net personal worth starts declining. It is much easier to recover at early stages than once you find yourself in deep financial crisis. Your net personal worth will also give you an idea about how financial institutions perceive you as a borrower.  For example, Deepak, an IT consultant with a software company wants to purchase a car. He has set his eyes on the Toyota Corolla. The car dealer informs him that the on road price of the car will come to Rs.11.25 L.  If he takes a car loan, he will have to pay a monthly EMI of Rs. 15,000 towards repayment of the car loan and pay an amount of Rs. 1.0 L as down payment. Deepak’s monthly salary is Rs.0.9L and the EMI as well as the down payment seems easily affordable. However, Deepak should assess whether he can afford to buy this car at present by considering all his liabilities and assets. His personal net worth should give him a fair idea of his current financial status and whether he can afford to buy the car.

Computation of Deepak’s personal net worth

Assuming that Deepak’s monthly outflow towards EMIs of outstanding loans is Rs. 35,000/- and looking at his personal net worth, a corolla is a viable option. This is because he has a positive net worth of Rs.18.73 L. Further he is able to make payments of EMIs with ease considering his current income and should also be able to pay the EMI on the new car loan.

Note that knowledge of current personal net worth is essential to make financial decisions. It is important to reevaluate personal net worth while making any important financial decision as the value of assets and liabilities is likely to change. Also, net worth should not be considered in isolation. It is a good idea to consider factors like current and future income levels, future liabilities etc. For example, if Deepak has to bear the expenses of his sister’s wedding which costs him approximately Rs. 9 L and he has to sell off some of his investment to meet the wedding expenses, his personal net worth will look different. Further, if the market value of assets declines, his personal net worth will also take a hit. Let us take a look:

Deepak’s Personal Net worth is he has to bear his sister’s wedding expenses and the economy takes a down turn:

Clearly, in the above situation, Deepak should not purchase a car at present and should concentrate on improving his personal net worth.