What Is Advantageous? Purchasing A Resale Property Or Investing In A Builder Property

Mrs. Nayana- our family friend intends to buy a residential property. Baffled by flooded builders offers and calls from the estate agencies, she phones to seek guidance to her bewilderment towards builder and resale property. Soon after her request we directed her with the advantages of purchasing the either, leaving her with her decision to decide which one to invest. Hope our genuine opinions and thoughts expressed guide her to make a right decision. Opinion and thoughts expressed are genuine out of our sheer personal experiences. 

1) Identifying the purpose for purchase.

If you are purchasing a property with an intention of immediately moving into the property, going for a ready-to-move residential property will always be a suitable option. Here ready-to-move signifies resale purchase or newly constructed builder property ready for possession. What needs to be evaluated here is the property location, accessibility, road connectivity, its amenities, neighbourhood – markets, supermarket, hospitals, malls, restaurants, schools & colleges, power station, future developments, etc. However a lesser known fact is that a resale property will be cheaper than a newly constructed builder property. The cost of the builder property is usually high because of the various amenities provided by the builder such as swimming pool, gym, gardens, club house, etc. The more the amenities the higher will be the cost of the property. Therefore choose wisely between resale and builder property depending on your personal needs and requirements.  

2) Know the applicable taxes and charges. 

As per the property norms you are required to pay charges to the government for purchasing a property in India. These charges are in the form of stamp duty, registration, intimation to mortgage charge (applicable only in Maharashtra), GST, etc. You are required to pay GST of 5% for purchasing an under-construction builder property or ready possession builder property (where OC is not issued) valued at Rs. 45lakhs and above & GST of 1% for affordable housing for properties valued below 45lakhs. No GST is applicable on completed or ready to sale properties of the builder where the Completion Certificate i.e. CC and the OC are issued. Along with GST, you also need to pay stamp duty of 5% (in Maharashtra) and registration charges (Rs.30, 000 for properties valued above 30lakhs & 1% of the property value for properties valued below 30lakhs. Stamp duty and registration charges vary from state to state. Which means for buying an under-construction property you pay GST (5% or 1%) +stamp duty (6%) + registration charges (Rs.30, 000 or 1%). On the other hand, the advantage of buying a resale property is that you save on the GST cost. There is no GST applicable on the resale properties. You are liable to pay only the applicable stamp duty and the registration charges. 

3) Know the loan funding for purchase.

Buying a property with your own funds is a rare ratio. You mostly approach a lender bank/NBFC to fund your property. Banks/NBFCs provide loans on the basis of your income eligibility subject to the LTV (loan to value) criteria. The LTV is the percentage of the maximum funding available on the market value of your property. The LTV norms are, 90% for property less than 30lakhs, 80% for property between 30lakhs-75lakhs and 75% for property above 75lakhs. No lender can fund beyond the LTV norms. The LTV criteria remain the same for resale purchase or builder purchase of under-construction or ready to move property. But the final loan eligibility on the basis of the property is calculated as lower of the two i.e. percentage of the agreement value or applicable LTV of 75%-90% on the market value whichever is low. In resale purchase 100% of the agreement value will be considered while in builder case 80% of the agreement value is considered. 

For example: If the market value of the property is 1cr and the agreement value is 80lakhs, the loan eligibility will be:

In resale purchase

1cr * LTV of 75% = 75lakhs

80lakhs * 100% of 80lakhs = 80lakhs 

Therefore loan eligibility will be 75lakhs (lower figure).

Alternatively, if the market value of the property is 1cr and the agreement value is 60 lakhs, the loan eligibility will be:

1cr * LTV of 75% = 75lakhs

60lakhs * 100% of 60lakhs = 60lakhs 

Therefore loan eligibility will be 60lakhs (lower figure).

In builder purchase

1cr * LTV of 75% = 75lakhs

80lakhs * 80% of 80lakhs = 64lakhs 

Therefore loan eligibility will be 64lakhs (lower figure).

Alternatively, if the market value of the property is 1cr and the agreement value is 60 lakhs, the loan eligibility will be:

1cr * LTV of 75% = 75lakhs

60lakhs * 80% of 60lakhs = 48lakhs 

Therefore loan eligibility will be 48lakhs (lower figure).

However please note in the builder case the cost of the property (COP) is of vital importance. Many lender banks/NBFCs consider this COP as a base instead of agreement value to calculate the loan eligibility i.e. 80% of the COP is considered. The COP consists of the agreement value, legal charges, share money/society formation charges, club house charges, maintenance charges, development charges, water connection charges, GST charge, etc. Stamp duty and registration charges are not considered in COP.

4) Know the OCR requirements.

Own contribution refers to the own funds required for purchasing a property. The ground rule of the home loan mortgage industry states that banks do not provide 100% funding for your property. The standard ratio is assumed to be 20:80 percent i.e. 20% own funding and 80% bank funding. However as per the calculation of the property eligibility norms of the lender, it is seen that the loan funding in builder property is always lower in comparison to the loan funding available for resale property purchase. Low funding implies requirement of higher own contribution and maximum funding means less own contribution required. Particularly true in the resale purchase, especially when the market value of the property is high while the saleable value of the property is lower than the market value. In such a scenario, you can draw maximum funding at times more than 100% of the agreement value. What you pay is just a stamp duty and registration charges. But such a type of deal is a rare combination. 

For example- if the market value of the property is 1cr and the saleable value is 70lakhs, as per the property eligibility criteria the loan eligibility stands at 70lakhs. Which means if you make an agreement of 70lakhs, the entire 70lakhs will be funded. What you have to shell out from your own pocket is just the stamp duty and registration charges.

Alternatively, if the cost of builder property is 50lakhs (inclusive of stamp duty and registration cost of 3lakhs + 5lakhs other charges), agreement value is 40lakhs, your own contribution will be:

50lakhs – 3lakhs (stamp duty + registration) = 47lakhs * 80% (funding norms) i.e. 20% will be your own contribution which will be 9.4lakhs. Your total own fund required will be 9.4lakhs + 3lakhs.

5) Understanding the Pre- EMI cost.

Pre EMI is generally associated with under construction builder properties. In pre EMI you pay only the interest on the partial disbursements of your loan amount. The Pre-EMIs paid do not have any impact on your principal amount or loan repayment tenure neither is it deducted from the total interest you will be paying. It is not a part of loan repayment tenure. Your loan repayment tenure will consist of Pre-EMIs tenure + loan tenure. Also there are no tax benefits on Pre-EMIs. In resale purchase the concept of Pre-EMIs does not exist. In resale you directly start repaying the loan through EMIs which consist of both principal and the interest amount. Pre-EMI is suitable, if you have interrupted flow of funds or you are staying on rent or you have financial crises or medical emergencies to meet, etc. Pre-EMI is a cost incurred only when you opt for a housing loan on under-construction property. However if you are capable of paying the initial slab wise demand of your builder through your own funds, you can save a substantial amount of interest or you may simply save your Pre-EMI  by going for a ready to move property. 

Additional Read: IS PRE – EMI BETTER THAN FULL EMI. FIND OUT YOURSELF.

6) Identifying the investment opportunity.

The basic intention for investing in a property is to build an asset for you, an asset which will have an appreciation value in the future. Either of the properties whether resale or builder will have an appreciation value in the long run. With a personal note, a resale property that can go for redevelopment will be your bonanza. In redevelopment the re-developer/builder offers you an extra 20-25% square feet area in addition to your existing property area. This at once appreciates the value of your property by 20-25%. In urban cities like Mumbai, there exists a lot of scope for redevelopment projects. The properties as old as 30-100 years stand a chance of going for redevelopment. But before investing in 30year+ old property ensure the property has clear and marketable title and the minimum age of the property is 7years if you are going for a housing loan. Get a title search and structural audit done for the property. The title search gives the ownership details of the property over the years and the structural audit report shows the exact age of the property and its current condition. But be cautious with redevelopment investments, as the fact remains overshadowed that the properties going for redevelopment do not qualify for housing loans. 

Related Blogs:

• Purchasing An Under-Construction Property? Here Are The Important Loan Facts You Must Know Before Making A Purchase
• Quick Guide To Difference Between Home Loan Builder Case & Resale Case
• What Loans Can I Get On My Property
• Why Is It Difficult To Get A Loan On Grampanchayat Property?

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