Due to the COVID-19 pandemic, an economic crisis engendering high volatility in the capital markets is leading to investors losing their hard-earned money, at least for the time being. Most of the sectors have been badly affected due to the COVID-19 economic crisis. According to analysts, property prices after have declined by two to nine per cent after March, when the lockdown first came into effect. Even though the property prices have come down, the pandemic and the resultant lockdown have put a brake on people’s aspirations of owning a house of their own.
Among those affected are homebuyers who decided to buy a property in the new financial year by taking a home loan. But these people are now no longer sure if they would be able to afford the equated monthly investments (EMIs). Their reasons vary, ranging from layoffs, lack of business earnings to salary cuts, among others. The real estate sector has been hit by the lockdown, as construction activity all but came to a grinding halt with looming uncertainty over project completion dates.
Although the Union Finance Minister, Nirmala Sitharaman, took major steps to contain the fallout, still there are certain factors beyond her control as well, including lack of available manpower at construction sites.
The macro-economic uncertainty coupled with job cuts has left the buyers confused. We have come up with a piece of consolidated advice for homebuyers, if they are after owning a property in the post-lockdown economic scenario.
What a homebuyer should do?
- It would be best for the potential buyer with capital to wait for a couple of months and keep a close watch over the liquidity situation of the market.
- “Supply chain issues, labour availability and issues of raising any form of institutional capital will have their impact on projects and development timeline. Therefore, it would be prudent for buyers to pick up units in completed projects or wait till the construction activity on the site is resumed when it comes to under-construction projects," says Ajay Sharma, Managing Director, Valuations (India) at Colliers International.
- It is prudent for a buyer to stick with prominent developers with a good track record with both customers and financial institutions. This will ensure safety in capital invested by them. “Given that residential pricing will be under pressure, good deals will come the buyer’s way but the timing of the buy should be prudent and not delayed in hope of more discounted pricing,” added Sharma.
- Buyers should evaluate their financial position, both current and in the next five years. They should carefully gauge if they are ready to take on any more loan liability, especially if they are solely dependent on monthly income from jobs.
- It would be important that they access all information from the Real Estate Regulatory Authority (RERA) sources to evaluate any buying-decision.
- It would be better if they take professional opinions from registered RERA brokers for a property before embarking on the decision to buy a project.
- “Buyers should closely work with their financial partner (banks or NBFCs) to obtain all information regarding the project they are evaluating," said Sharma.
- Also, buyers should keep a sharp eye out for interest rates and take advantage of low-interest regimes at the same time. According to Adhil Shetty, CEO, BankBazaar, "With interests at an all-time low, this is a good time to buy a house. We’re currently in a low inflation period, and there are few triggers for an interest rate spike. Therefore, with rates falling regularly, a repo-linked loan will work to the borrower’s advantage.”
- A ready to move-in flat is more advisable to buy as compared to under-construction ones. Avoid putting your money into incomplete projects.
- Check the builders' detail and then go and buy ready to move-in flats. Check all RERA rules before buying a flat. “Opt for a longer tenure if possible. While this means a higher interest rate, it means smaller EMIs. You can start putting together a small kitty towards your home loan, which you can pre-pay from time to time. This will reduce the impact of your increased tenure,” adds Shetty.
- For example, assume a loan of Rs 40 lakh at 8 per cent interest. For a 20-year loan, you will be paying an interest of Rs 40.3 lakh. For the same loan, you will have to pay an interest of Rs 65.7 lakh if the tenure is 30 years. However, a prepayment of Rs five lakh at the end of the third year will bring down the interest payable to Rs 41 lakh. Use a calculator to understand how you can prepay your loan to get maximum benefits.
- Consider opting for a smaller house with fewer premium amenities. This will bring down the costs for now. Over time, you can upgrade to a bigger premium home.
- With respect to any purchase decision, it is advisable to bring in financial consultant and take informed calls based on one’s ability to take liabilities.
- If the buyer is to dispose of a property to buy a new one, it would be best to complete the deal before signing on for a new apartment. This will ensure cash flow continuity and no hard surprises.
- It’s a common practice to monetise long-term savings like PPF to finance buying of the property, but in current times, it would be sensible to leave at least 9-12 months equivalent of monthly income in savings before buying a new property.
- Fiscal prudence should be paramount and it will help in making the right decisions for buying property.
Pandemic affect from a buyer’s perspective:
- There will be two types of home buyers after the lockdown period, those who have capital at hand and those who have secured job but need a home loan, says Sharma.
- The former will look for properties that are complete and compliant from all perspectives as it would be a safe investment though buy-in price may not be much discounted.
- Investors will have to look at buying for the appreciation of capital value with low consideration for yields that are already very low
- The push of government for rental housing might see investment into residential units. Potential buyers could be at an advantage in view of the financial sops that could result in decent returns.
- Buyers will need to carefully assess two risks- liability risk and property risk. Liability risk will entail the loan taking ability and servicing ability in light of macro-economic issues.
- Property risks will entail the development stage, progress, solvency of the developer and the ability to complete the project. A delay in raising capital and progress in work will spill over into liability risk and buyers will carefully look at de-risking themselves.
- Buyers’ cautious approach will defer their buying and preference shift depending on the pricing of the units. Both buyer types will expect discounts from developers and push for box prices that could land them a good deal. “A fair amount of paperwork and verification are also involved. So, also utilise this time to keep these ready, says Shetty.
Things to keep in mind post-COVID-19 lockdown:
- It is important that a potential buyer of residential real estate have their PPEs on at all times when going for on-site inspection.
- It is best to wear gloves and avoid touching surfaces to minimise transmission risks.
- It would be advisable to carry out all documentation online.
- With respect to any purchase decision, it is advisable to bring in a financial consultant and take informed calls based on one’s ability to take liabilities. “If the buyer is to dispose a property to buy new one, it would be best to complete the deal before signing on for a new apartment. This will ensure cash flow continuity and no hard surprises,” says Sharma.
- It is a common practice to monetise long term savings like PPF to finance buying of property but in current times it would be sensible to leave at least 9-12 months equivalent of monthly income in savings.
- Fiscal prudence should be paramount and it will help in making the right decision for buying property.
- Make sure you have a good credit score. Check there are no misses and pay special attention to ensure that you pay your bills on time in full.
- There will be a certain amount of credit tightening, and a good credit score can go a long way in ensuring that you get a good deal on your loan.
- Increase your emergency fund, so that it covers six months to an year of salary as a security. This will ensure you have more funds at hand in case of an emergency. This also gives you sufficient time to get another job in case of a job loss.
- Read and understand all the property-related documents before you finalise your purchase. Take legal help if required. This will save you heartache in the future.
- It would be anywhere between a couple of weeks to a couple of months before you can actually go ahead with the purchase. Take this time to understand how home loans work, especially external benchmark-linked ones.
- Different banks have different loan qualification criteria such as the borrower’s age, job profile, employment stability, credit history and others. Use calculators and eligibility charts to understand your eligibility with a particular lender to avail the best possible offers.
- Lenders set terms and conditions pertaining to the repayment of home loans. So, you need to clarify the terms related to settlement/foreclosing the outstanding amount, transferring the balance to another lender’s account, pre-paying a part or full amount of home loan before finalising a lender.