In a city like Mumbai, where the average house costs Rs.1.45 lakh, there is no need to be extravagant.
Yet it can be a tough task to build one in your own home.
And the only way to do it is by getting a mortgage, says Amit Deshpande, managing director at Mumbai-based Pune Private Bank, which has over 2,500 branches.
“There is a big demand for such mortgages for the private sector,” he adds.
But how do you build one?
How do you do it when there is little demand?
And is the mortgage-based model as attractive as its online counterparts?
How does one finance a home without a bank?
How to manage a mortgage-related project like a house-cleaning?
How will you finance a property in a time when the private loan market is already flooded with loans?
The answer, according to Deshpade, is to go with a mortgage.
“The way I look at it, you need to do both.
And there is very little risk.
And if you have a mortgage you can get it back.
If you do not, it is more risky,” he says.
And it is not just the cost that is a concern.
The cost of a mortgage is higher than the interest rate that you would have to pay.
“But if you can manage it, it makes a big difference,” says Deshpades father, Amit Deshpande, who is also chairman of the Mumbai City Development Authority (MCDA).
“You get a loan and if you repay it at a time of high demand and demand comes back, you have created more demand,” he points out.
A good mortgage can also be financed at a lower interest rate than the one you get from a bank.
“It’s like a loan at the lowest rate,” says Amit, who also manages a large Mumbai-listed firm, Birla Group.
So, how can a person pay a mortgage?
“A loan that is less than 10% of the total amount you owe will not pay off,” says Mr. Deshpase.
“And that is where you get into trouble,” he continues.
For example, in a property deal, if the total purchase price is less that Rs.2 crore, the total mortgage payment is Rs.250,000.
The lender has to get the loan amount down to Rs.100,000, but the interest will go up.
“If the borrower is willing to pay Rs.50,000 for the mortgage, that’s a good loan,” says a banker who spoke to The Hindu on condition of anonymity.
So what is the ideal loan?
The ideal loan is a mortgage loan that has a lower loan-to-value ratio than the market rate.
In other words, the lender is getting a better return on its investment than a loan that goes up in value.
This is the standard formula used to finance private mortgages, with a lower ratio than market rate, says Ankit Gupta, senior partner at Private Capital, a Mumbai-headquartered firm that helps private investors with private loan projects.
He adds that the ratio of the rate to the rate can be as low as 0.2% or as high as 1.5%.
“This is the only type of loan that works well in Mumbai,” says Gupta.
“This means the lender will get a return on the investment.”
For a mortgage of this type, the bank will have to take the total of all interest payments and then divide the sum by the number of loans outstanding.
So in a case where the total loans outstanding is Rs 3 crore, for instance, the interest payment will be Rs 1.4 crore.
This yields a ratio of 0.75% for a home-clearing loan, according the banks’ guidelines.
For a house cleaning, the ratio will be between 0.5% and 1%.
So the average interest rate for a house will be around 1.2%.
How can a private lender finance a mortgage without a banking relationship?
“It will be difficult for the lender to take on the loan without a formal relationship with a bank,” says Anand Swaminathan, founder of Private Capital.
The banks are also aware of this.
“We have been in talks with all the major banks about taking on such projects,” he explains.
The private lenders are also happy to do the banking.
“They are ready to do a mortgage for a private company,” says an executive of a private lending firm.
But he adds that if a private loan is being done for a non-commercial purpose, the bankers will have a different view.
The most common objection against a private bank is the risk.
“Many times, the private lenders do a project that they know very well and know the risks and how they can take them down,” says Vijay Srivastava, co-founder of Prashant Kale