Dear members, Need expert opinion on the below, though I am pretty sure this is a common scenario. I recently bought a flat in Bangalore worth of 45 lakhs for investment purpose. 85% of the cost is funded through home loan. Anticipating that the flat value will go up 25 to 30 % in next 2 yrs, I am planning to sell it after holding for atleast 2 years. On the other side, If I rent the flat in the mean time, I am worried that the resale value will go down and would not be able to get my expected profit. I am sort of not sure what is the best way of doing with the property after you invested in it.Should I rent the property or keep it unoccupied for maximum 2 yrs and sell it as a new flat for a better resale ? can someone give me an expert opinion what do people normally do in such scenario? Also, If i get a prospective buyer in the later stage and sell of the flat, how do people normally settle off their home loans ? I believe you would repay the entire loan amount but with some penalites from the bank for pre-closing of your loan ? what is the approximate penalty amount generally in that case ? Thanks Vino3m

I think that renting the flat is the best option for you for the following reasons:

1. When someone stays in the apartment, it stays in good working condition; an empty apartment may develop some problems that may go undetected and may actually result in the deterioration of the apartment.

2. Since your apartment is financed to the extent of 85%, the rent you get from the apartment can go towards your monthly EMI thus reducing your burden.

3. It opens up a whole new market of buyers who are interested in buying apartments for renting ; and since yours will already have a tenant, it becomes more attractive for the buyer.

Having said that, it is important to remember that the tenant should be high quality like a corporate , MNC etc.

Your second question was with regard to the settlement of your home loan in case of a sale of the apartment. The process is fairly simple, wherein, the buyer issues two cheques, one favouring the bank to settle the loan outstanding and the other to you for the remaining amount. Of course you would need to provide the prospective buyer with all the necessary documents in advance, such as a letter from the bank listing all the documents held by them.

As regards prepayment, a loan can be prepaid either in  part or in full at any given point of time. You can also prepay a loan even when it is only partly disbursed. However, most banks  have an upper limit on the number of times a person can prepay his loan in a year as well as on the minimum amount you can prepay each time. Until recently, banks charged a penalty for part or full prepayment. Increased competition has forced most banks to allow repayment without any charges if it is funded from own sources. In case the borrower, is transferring the loan to another lender he will need to pay the full charges.Typically the loan will attract a prepayment penalty if it is prepaid in full by sale of the property that it had financed. The prepayment penalty may be 1-2% of the loan outstanding.

I think you have missed out one basic issue. Selling a property 2 years after you have bought it will result in short-term capital gains: your holding period needs to be 3 years for it to qualify as long-term. The rate of income-tax applicable to your short-term capital gains will be at your personal income-tax slab. Assuming your income is in excess of Rs. 5 lakh in the financial year (that seems reasonable to expect even if this is your only source of income, considering the flat is purchased for Rs. 45 lakh), the tax rate will be 30% of the gains, plus surcharge of 10% (income in excess of Rs. 10 lakh).

 To know the prepayment penalty, one needs to know whether the loan is at fixed or floating rate, and which bank is it from. Most banks allow some amount of prepayment without penalty if the loan is at floating rate, but almost all with charge a penalty for prepaying fixed interest rate loans --- the charges could be in the range of 2% to 3% of the outstanding loan/ prepayment amount.

Best Wishes, Lovaii