With foreign banks finding their way to India soil, finding capital for your investment is getting much easier now compared to a decade back. Whether you are looking at buying a TV or a vehicle or property there are plenty of options now available, if you can show some fund flow for the previous six month.
By fund flow I mean monthly salary or business returns. More than the salary or business returns, the financiers might also look out for the monthly average excess in your bank account, so that they can judge whether you would be in a position to service their loans.
Earlier when people made a modest living, they would never go for a loan for investing in a vehicle or even in an apartment. This was the case about 15 years back. Banks used to provide loans for housing only up to 15%, the rest of the 85% would come from the home purchaser. The general thought was that property, like a home, was almost a dead investment. Real estate was never a priority sector lending to nationalized banking, it was a small industry. It was agriculture which was the priority sector lending for the bank. However, it seems to me that both the sectors have been overlooked these days and home loans have taken higher precedence.
When financing the small industry, banks used to look for the Debt (loan amount): Equity (owners capital) ratio. Normally, they considered this ratio to be around 3:1, which means that if the investment is 30 lakhs, the owner should have brought in 10 lakhs. Going by the same thought, this can be applied to purchasing a house as well. For example, for a 30 lakh property, it is better that 10 lakhs (approx 30%) is brought in as your contribution. The more your contribution, the safer you feel and more the debt content, more of an invitation to trouble.
Finally, my two cents on this topic particularly on property transaction, are to look at the trend in last 15 years are so, on a year to year basis. If the increase has been 10 to 15% then its a safe bet to invest, had the rise been steep like 100 or 200%, there would be some correction. The correction could even be the pricing stabilization without raising it further, which means that whether you purchase now or 4-5 years down the line, there may not be much variation.
Further one has to keep in mind that unlike the west, India does not guarantee social security for its citizen during the sunset years and hence it is better to do some home work before taking the debt route for financing your property investment.
The writer is a correspondent of Youth Ki Awaaz
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