Mobilising up-front money for construction in line with RBI’s instructions requires a planned approach in saving patterns, says Balaji Rao

After various instances of banks and housing financial institutions getting into trouble over the last couple of years by way of rising non-performing assets (NPA) because of with economic uncertainties, the RBI has instructed the lenders to mandatorily maintain a lending ratio of 80:20 for all home loans.

The aspiring borrowers are now asked to bring in 20 per cent of the property value and the rest would be funded by the financial institution. When the economy was booming such procedures were not followed and that led to precipitation of bad loans. The regulators then got strict. This measure eases the pressure on the banks and improves its liquidity situation, thereby giving it an opportunity to lend for other segments of loans and over time it could even help them in addressing the NPAs.

But for individuals this stringent norm could lead to difficulties in mobilising huge sums that have now become inevitable. With construction costs escalating by the day the entry-level houses by way of apartments have almost become sour grapes. On an average the cost of a two-bedroom flat could range anywhere between Rs.40 lakh and Rs.60 lakh, which would lead to an upfront funds requirement of Rs. 8 lakh to Rs.12 lakh, besides related expenses such as finishing work.

Even the cost of construction if one is building an independent house has escalated with per square construction cost ranging from Rs.1.30 lakh to Rs.1.75 lakh, which would depend upon the quality of work. Constructing a 1,000 sq. ft house could cost approximately Rs.15 lakh plus other expenses.

Different solutions

We now come to the million dollar question of how one would have to arrange for the required 20 per cent of the construction cost or the apartment cost. Across the strata of the society each one would think of different solutions based on affordability. A few aspects of such solutions are being discussed here.

The world renowned investor Warren Buffet has said that “Do not save what is left after spending, but spend what is left after saving”. This statement, perhaps, should be framed and nailed on the walls of our living rooms.

There are several opportunities to invest our savings such as investing in Fixed Income Instruments – investing in traditional investments such as bank & post office RD & FDs and other government guaranteed instruments; equities – buying stocks directly and/or investing in equity mutual funds; metal – buying gold, silver and such other.

On investments, Mr. Buffet also adds, “Do not put all your eggs in one basket”. To follow this one should choose to invest in all the assets that are mentioned above. The proportion of such investments by way of an asset allocation pattern should be decided in consultation with a good financial planner/advisor.

Asset allocation is to invest in certain proportions in all the assets with proper predetermined percentages. For example, if you have Rs.10,000 to invest, you may choose to invest equally in all three assets – Rs.3,300 in debt, Rs.3,300 in equities and Rs.3,300 in metal. Assuming that over a five-year period if debt gives nine per cent, equity gives 15 per cent and metal gives 12 per cent, the average returns would be 12 per cent annualised. For attaining higher returns you can increase or decrease the proportion which would lead to increase or decrease in the overall returns (average returns across assets).

Let’s remember that without taking risks getting even one per cent of extra returns is not possible. Many of us struggle to mobilise large amounts of funds which would lead to borrowing money from various sources by way of interest bearing loans (taking personal loans, office loans, loan on insurance policies, top-up loan etc.) and hand loans, which eventually could lead to other collateral problems. The best way to address the situation would be to start an investment plan early, plan for future events in advance, reduce unnecessary expenses, take the asset allocation route and if possible build a good corpus of down payment wherein you could put in more upfront money as margin than the mandatory 20 per cent as directed by the RBI.

The Oracle of Omaha, as Mr. Buffet is referred to, has this to say on spending: “If you buy things you do not need, soon you will have to sell things you need”. Follow a spending plan as well. Given the current situation of the economy, uncertain job market and various instabilities it would be prudent to have a leash on spending habits.

Investing in a house is for creating an asset. Careful planning can make you be on the right track for making it a wise investment.