CAIIB-Retail Bank-MOD-E-Mortgage Advice

Unit - 22 : Mortgage Advice

In India, mortgage advice profession is carried out without any regulations. There are regulations in US, UK and other countries regulating the mortgage advice services.

Home Information Pack

This concept is being introduced in UK from 1st August 2007. The content of the pack is list of documents to be provided. The important compulsory documents are :

1. Sale statement providing basic information about the site including the address of the property being sold, whether the property is freehold, leasehold,whether or not the property is being sold with vacant possession.
2. Evidence of title to prove that the seller owns the property and therefore has the right to sell it.
3. Energy Performance Certificate indicating how energy efficient a home is on a scale of A-Q The most efficient homes - which should have the lowest fuel bills are in band A.

Time Value of Money - Interest and Annuities

Re. 1 received today is worth more than Re. 1 receivable at some future date, because Re. 1 received today could be earning interest in the intervening period. This is the concept of the time value of money.

The process of converting future sums into their present equivalents is known as discounting, which is simply the opposite of compounding.

What if interest is paid more frequently?

Annually = P( 1 + r) = Annual compounding
Quarterly = P(l + r/4)4 = Quarterly compounding
Monthly = P(l+r/l2)12 = montly compounding

The Rule of 72

This rule allows you to determine the number of years before your money doubles whether in debt or investment.

Future Value of Money

For finding out future value (FV). we must use compounding formula which is given

FV = PV( 1 + r)n

Where PV means present value, 1 means one rupee, r means rate of interest and n means period or term.

Example:
If Rs. 100000 is invested for a period of 5 years at interest at 10% p.a. find the maturity sum i.e. future value

Solution

The formula for finding FV is 
FV = PV( 1 + r)n

= 100000(1 +0.10)^5
= 100000(1.10)^5
= 100000(1.61)
= 1610000

So the maturity sum will be Rs. 1,61,000

Future value of annuities

Annuities are essentially series of fixed payments required from you or paid to you at a specified frequency over the course of a fixed period of time.

Ordinary Annuity : Payments are made/received at the end of each period.

F = A [(1+i)^n] / i  or FV = Annuity x CV factor

Where,
F = future value of an annuity
A = annuity
i = interest rate
n = term

Annuity Due : Payments are made/received at the beginning of each period.

F = A [(1+i)^n - 1] / i x (1+i)

Where,
F = future value of an annuity
A = annuity
i = interest rate
n = term

Example :

Future value of annuity due of Rs. 1000 for a period of 5 years at interest rate of 5% would be

FV (Annuity Due) = A [(1+i)^n - 1] / i x (1+i)
= 1000[(l+0.05)^5 - 1)] / (0.05) x (1+0.05)
= 1000 x 5.525 x 1.05
= Rs 5801.91

Present Value

Present value is nothing but the reverse of future value. The formula :

PV = FV + (1 +r)n   or PV = FV x PV factor

Where,
PV means present value
1 means one rupee
r means rate of interest
n means period or term
FV means future value

Example:

If Rs. 161000 is the maturity value(future value) of investment, invested for a period of 5 years at interest at 10% p.a. find the amount invested (present value).

Solution:
The formula for finding PV is
PV = FV/( 1 + r)n

= 161000/(1 +0.10)^5
= 161000/(1.61)
= 100000

So the present value will be Rs. 100,000

Capital Gains

Any profit or gain from sale or transfer of a capital asset is chargeable to tax under the head "capital gains" Capital asset means any property whether movable or immovable, tangible or intangible.

The following assets are, however, excluded from the definition of capital assets :

1. Stock-in-trade, stores, raw material
2. Personal effects (excluding Jewellery)
3. Agricultural land outside the limit of municipality or notified area.

Types of Capital Assets

Short-term capital assets

Short term capital asset means a capital asset held for less than 36 months immediately prior to the date of transfer. However in following cases, asset held for less than 12 months is treated as short term capital asset :

1. Equity or pref. shares (quoted as well as unquoted)
2. Debentures/Govt. securities listed in a recognized stock exchange.
3. Units of UTI/Mutual fund specified under section 1()(23D)
4. Zero coupon bonds (whether quoted or not)

Long-term capital assets

Long term capital asset means a capital asset held for more than 36 months immediately prior to the date of transfer. However in following cases, asset held for more than 12 months is treated as long term capital asset:

1. Equity or pref. shares (quoted as well as unquoted)
2. Debentures/Govt. securities listed in a recognized stock exchange.
3. Units of UTI/Mutual fund specified under section 10(23D)
4. Zero coupon bonds (whether quoted or not)

Capital Gains - When and to What Extent Exempt from Tax

1. Capital gains arising from the sale of residential house property (Section 54) is exempted provided the property is held for more than 36 months before sate and transferor has purchased another residential house by utilizing the capital gain amount within one year before sale of old house or within 2 years from the date of sale or construct a new house within a period of three years from the date of sale. If the amount of capital gain is not fully utilized for above, then only proportionate amount that is utilized will only be exempt.
2. Capital gains from transfer of land used for agricultural purpose (Section 54 B) is exempt if utilized for purchase of another land.
3. Capital gains on compulsory acquisitions of land and building of an industrial undertaking - (Section 54 D) is exempt if utilized for purchase of another land and building
4. Capital gain is invested in bonds issued by National Highway Authority of India or RECL (Section 54 EC)
5. Capital gains on transfer of long term capital assets other than a house property - (Section 54 F) is exempt provided the transferor has purchased residential house by utilizing the capital gain amount within one year before the date of transfer or within 2 years from the date of transfer or construct a new house within a period of three years from the date of transfer. If the amount of capital gain is not fully utilized for above, then only proportionate amount that is utilized will only be exempt.

Long term capital gain on transfer of property is taxable at a flat rate of 20% (plus surcharge and education cess). The surcharge @ 10% is applicable if the total income including capital gains exceeds Rs. 10 lakh.

The documents relating to the following transactions of immovable properties are required to be compulsorily registered :

1. Gift
2. Lease of immovable property from year-to-year or for any term exceeding one year
3. Instruments which create any right in an immovable property of a value of more than one hundred rupees

The registration fee for the following immovable property transactions is leviable on the market value of property on which stamp duty is charged.

1. Conveyance
2. Exchange
3. Gift
4. Partition
5. Transfer of Lease by way of Assignment
6. Sale
7. Settlement
8. Power of Attorney given for consideration
9. Authorising the attorney to sell the property

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