All About Offset Balance Home Loans

Kishor Pate 2Kishor Pate, CMD – Amit Enterprises Housing Ltd.

Offset balance home loan is an arrangement that some banks offer to customers who do not have the funds or saving ability to prepay their loans.

In this arrangement, the client needs to deposit whatever extra income is available into a current account, which is the offset against the outstanding amount on the home loan.

The borrower’s salary account can also be linked for this purpose, from which he or she will have to make only judicious withdrawals going forward to ensure a surplus balance. Banks will usually encourage customers who are contemplating this route to use the salary account option.

In many cases, offset interest home loans can be more advantageous than prepaying the loan. With this product, the customer can potentially reduce the tenure or the loan and also save on interest.

In the case of prepayment, banks usually require a minimum amount be paid, but this is not required with an offset balance home loan.

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The bank calculates the interest on the basis of daily reducing balance. The downside of the offset balance home loan is that the chargeable interest is higher than for a conventional home loan – usually by 25-50 basis points.

Also, if the loan is linked to a salary account of someone without the ability to save prudently, the arrangement can backfire.

Offset interest home loans may be suitable for individuals who are not in the habit of saving regularly or prudently. This makes prepayment of a home loan in part or eventually in whole impossible for them, so such a product would probably be their only viable recourse.

However, it is actually wiser to invest one’s surplus funds diligently in some other instrument such as mutual funds. The proceeds of such an investment on maturity can be used to prepay the home loan at a predictable time.

Interview with Kishor Pate, CMD, Amit Enterprises Housing Ltd

Kishor Pate 2Kishor Pate, CMD – Amit Enterprises Housing Ltd. in an interview with Nishi Rath of Customer Click magazine

1. Which are the cities/ towns that you are focusing on for new projects? According to you, which are the regions that have huge potential or scope for growth to attract investments in the next 10 years?

We are currently focusing on Pune and Nasik and also have our sights set on Mumbai. Pune continues to be the growth powerhouse for us, but we are very impressed by the pace with which Nasik’s property market has picked up and have now launched a mid-range residential project there.

Mumbai is, of course, a market which is impossible to ignore for any serious developer. We are in the process of finalizing our entry into the financial capital in the near future.

2. Which are the segments that you are targeting? Are you planning to expand your offerings?

We are primarily focused on residential projects, as this is where the greatest need and therefore demand lies. We have spread our development activities more or less evenly across the mid-income and luxury homes segments and have offerings in both categories, both of which are doing very well.

3. Could you share something about your current important projects?

Our ultra-luxury project in Sahakarnagar in Pune is currently on the top of our priority list. The project is in the final stages of completion next to AEHL’s previous project 9 Green Park, and is spread over 4.3 acres of Sahakarnagar’s most spectacularly beautiful hilltop location.

Comprising of two high rise towers of ultra-luxury living spaces, each supported by multi-storeyed reserved parking, this project will deliver 62 apartments to Pune’s most discerning home buyers in the city’s most aspired-for residential location.

4. What differences do you see between young buyers and older buyers in terms of what they want in design?

The most notable difference is visible in the luxury housing segment. Not only the concept of luxury but also the profile of luxury home buyers has changed dramatically over the past few years.

Previously, the demand for large, well-appointed homes came primarily from ‘old money’ – that is, families which have had amassed wealth over several generations, either through business operations, investments or inheritances.

The configuration of choice for such families was bungalows built on family-owned land, embellished with various luxurious amenities. Such homes existed in these families for decades, and rarely reflected the changing times.

Today, the ranks of HNIs in India do not include only such families. The country’s IT and manufacturing boom has brought wealth generated by high-paid jobs and new business enterprises into the picture, as well. The average age of luxury home buyers is now between 35-42, and the requirements that such individuals have in terms of luxury housing has also changed.

While there is still a focus on spacious living, there is an increased accent on ‘smart home’ accoutrements, high-end common amenities and technologically evolved security. These were certainly not factors which went into the definition of luxury living a couple of decades ago.

Today’s buyers of luxury homes are highly aspirational and, more importantly, tech-savvy. This means that they are able to put to use their knowledge of IT technology to increase their families’ lifestyle quotients.

5. Are the customers brand cautious, when it comes to the components used while construction?

As a general observation, today’s home buyers are equally focused on value for money and brand value. This means that they expect to get fair value for their investment, but are also choosy about where they get this value from. Within any given price or budget bracket, there is a marked preference to offerings by reputed developers who have established their credibility on the market in terms of construction and design quality as well as transparency.

6. Apart from bigger parking spaces and larger lobbies, what are the other factors that a premium customers look at?

They look for premium locations, smart home features, high levels of security and superior interiors and overall specifications.

7. What is the average life of a luxury building being constructed these days? Is it going up or down?

The average life-span of a project that has been built on quality construction parameters is around 80 years. After this period, a project will usually come up for reconstruction. It should be remembered that the true investment value of a residential unit such as a flat does not actually lie in the flat itself, but in the flat owner’s share of the land that the building occupies.

In other words, it is the undivided land portion of the investment that one has made in a flat that amounts to the actual value of one’s investment. However, in real estate market terms, the longevity of a building is very much linked to how much it will fetch on the resale market, or how long an investor can derive rental income from it.

From the point of view of personal use of a flat for occupancy, quality construction ensures that the owner will incur much lower maintenance and repair costs and enjoy its security and comfort for much longer.

8. Reports say that several builders of luxury properties have done away with floor rise premium. What is the key reason for this?

Some cities are seeing a large supply of luxury projects, so developers are offering various incentives to remain competitive.

9. How is the demand for luxury homes in tier II and tier III cities? What is the future outlook?

Demand for luxury housing in cities other than the metros is very much a city or town-specific function. Not all cities and towns have the kind of economic drivers that will result in demand for luxury homes. It is largely cities where IT / ITeS and/or manufacturing are strong factors that have the greater potential.

10. India is a price sensitive country, how do you convince the customers about value for money?

Within any broad price or budget bracket, there are a number of options available to home buyers. When a developer with an established reputation for construction quality and superior designs has a project in a certain location, buyers will prefer to buy into such a project even if it means stretching the budget to some extent, since they know that by doing so they are safeguarding what is in most cases the biggest investment of their lives.

As such, AEHL does not have to ‘promote’ its projects – all we do is inform prospective buyers that we are offering options in a certain location and budget range.

11. Foreign players are very active when it comes to innovation and use of latest technologies. How would you rate the domestic players on the innovation and technology scale?

As already mentioned, Indian home buyers – especially in the luxury bracket – are very much attuned to the ‘smart homes’ concept and expect to have such features in their homes. Developers are catering to this trend wherever it is popular and applicable within the price bracket of a project. Yet another innovation we have seen of late if the use of Alu-Form construction rather than conventional construction methods.

The Alu-Form system is a revolutionary innovation in construction technology that allows for the speedy, accurate and highly consistent casting of all internal and external walls, columns, beams, floor slabs, stairs and other parts of a concrete building. It is an integrated system which merges the wall and slab panels into a seamless unit. With a drastic reduction of form-jointed sections, the end products have superior resilience to wear, tear and degradation.

Using the building’s architectural blueprint as a guideline, highly resilient aluminium panels are pre-designed for all concrete elements of the building’s superstructure. Alu-Form technology allows internal electrical fittings and plumbing to be incorporated with a high degree of design efficiency, and as part of the overall building plan. This factor reduces the probability of electrical and plumbing failures. On the rare occasions when they do occur, such problems can be quickly isolated and fixed.

This contributes to the overall cost-effectiveness of owning a home constructed with Alu-Form technology. Moreover, the use of this construction technology vastly reduces the chance of on-site mishaps, making it one of the safest systems for building construction currently available.

Alu-Form construction technology involves extremely efficient, light-weight and flexible materials and cuts down on the need for messy brickwork, concrete leakage and the use of conventional, polluting construction equipment. It is therefore one of the most environmentally friendly construction techniques on the market

Significantly, Alu-Form technology puts an end to the problems of construction irregularities and asymmetrical aesthetics which plague even the best of projects. The finished units are flawlessly balanced and streamlined, providing a finished and sophisticated look and feel.

12. How important is technology adoption for the real estate industry? What are the latest technologies that have been adopted by you? How will it help improve customer satisfaction?

At Amit Enterprises Housing Ltd, we are engaged in a constant quest for innovative methods of delivering quality homes to our customers. One aspect of this quest is finding and implementing new methods of cost-effective, eco-friendly, high-grade construction. We see no reason why homebuyers should compromise on quality when they approach us for homes that fit their budgets.

These factors, along with our continuing commitment to the principles and practice of sustainable development, have logically led to our adoption of Alu-Form construction technology in our projects. We are also on the fore-front of the sustainable development movement in Maharashtra, with most of our new projects having attained ‘green’ certification.

13. According to various reports, there is a piled up inventory in the present residential market? What are the reasons behind this and can we expect a price correction soon?

In a correction, a property market changes from a sellers’ market to a buyers’ market. Demand for homes decreases and the value of one’s property goes down. Every kind of property owner – be it end user or investor – worries about the property market going down and prices ‘correcting’. The word ‘correction’ in itself implies that there is something wrong which needs to corrected.

Real estate corrections do not happen on a national, state or even city level. If and when they occur, they occur in areas of cities where there are a lot of apartments which are priced too high. When the prices come down, demand picks up again, so the local market has ‘corrected’.

With a constant and steadily increasing demand for residential property in Pune, there is no likelihood of a property market correction. In fact, as indicated by the trends over the past years, property prices will continue to increase every year at a minimum of 7-8% in every location.

Quick Tips On Investing In A Property In Pune

Kishor Pate 2Kishor Pate, CMD – Amit Enterprises Housing Ltd.

Should You Buy Or Rent?

People either buy or rent apartments for different reasons. Obviously, it makes sense to rent if one does not intend to settle down in a particular city or area within that city, or if one’s financial circumstances do not support home purchase even via a home loan.

Even if one’s financial status does support the purchase of a mid-segment home, renting is usually the only option if one wishes to reside in a high profile area where property prices are very expensive.

However, if all the circumstances are right, purchasing a home is something every Indian should and does dream of. Owned property is the ultimate investment. Home ownership provides not only shelter and security to one’s family, but also a justified sense of pride.

If one is happy in a certain location, it makes much more sense to pay monthly EMIs towards one’s own home rather than monthly rental, which bring no returns at all.

Can You Face Problems In Getting A Home Loan?

While attempting to procure a loan, customers can certainly run into difficulties. One of them can be lack of eligibility or a bad credit score.

If the bank is not able to satisfy itself that the client has the ability to repay a home loan for any reason, it may ask for more documentation and guarantees or even refuse the loan altogether. This can happen with clients from certain professions which banks perceived to lack steadiness.

Other difficulties which a client can face is not being able to produce all the documents required for home loan approval, or the bank refusing to provide a home loan for purchase of a property which is over-priced, does not have a clear title deed or is in a project for which the developer did not obtain all the necessary clearances.

Things To Check Before Taking A Home Loan

The first thing to be checked is one’s own eligibility for a home loan, and one’s ability to service such a loan consistently. Clients should remember that a home loan is a significant long-term financial commitment.

If these factors are in place, the client should check the rate of interest that a bank is quoting for fixed as well as floating rate-based home loans.

Secondly, one should establish whether the bank has a reputation for flexibility when it comes to renegotiating home loans. It makes sense to contact other people who have availed of home loans from the same bank whenever possible, and to ask them about their own experience.

As a general rule of thumb, the monthly EMI being paid on a property should not exceed 40-45% of the family’s total monthly income after all other loans or recurring financial commitments have been accounted for. If it exceeds this, the likelihood of defaulting on the home loan increases significantly.

Vehicle loans should be paid off within the shortest tenure that banks permit, which is usually three years, and should be prepaid whenever finances permit.

A family should also make sure that it has medical insurance for all family members, and with sufficient coverage for unforeseen medical emergencies, as these can be extremely expensive.

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How To Arrive At Your Property Purchase Budget

The budget for property purchase should be finalized on the basis of:

• Available savings (which will decide how much down-payment can be made on a home loan)

• Current family income and reasonable expectation of increase in income (based on annual salary hikes)

• The family’s current requirements in terms of space and facilities, and the increased requirements in the future (based on family growth, elders expected to come and live with the family, etc.)

How Has Pune Real Estate Been Affected By The Current Economic Scenario?

Every property market in India has been affected by the changing economic environment to some extent. The cities that have been most affected are those which do not have sufficient economic activity.

The property markets in such cities are affected more by economic downturns because there are not enough well-paying jobs being created. In other cases, the available property stock in the city is over-priced and not affordable to most home buyers.

Pune’s property market also saw a certain degree of slowdown, but it has done much better than most other cities in India because of two important factors:

• Pune has three major industry segments to support its economy – manufacturing, Information Technology (IT), Information Technology-enabled Services (ITeS), industrial and automobile manufacturing and the services industry. These industries have consistently been creating sufficient jobs with good salaries, and this factor supports the property purchase rationale.

• High competition among developers and a healthy supply of projects has ensured that Pune’s property prices have remained affordable to home buyers. Another factor that has maintained affordability is that Pune’s real estate market is mostly driven by end users and not speculators. Though there is also investor activity, investors are not able to quote exorbitant prices because Pune is a price-sensitive market and will therefore not accept unnatural price escalations.