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The Roof Is On Fire

With home loan rates heating up, it pays to play safe, avoid a debt trap

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The Roof Is On Fire
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A 2,500 square foot flat in suburban Mumbai well before he retired, it was the only thing Venkatesh Krishnaswamy had wished for. But with retirement looming on the horizon, Krishnaswamy recently received a notification from his home financier that the tenure on his home loan has been extended by another three years. “I have to rework all my finances and make sure I pay off the loan before I retire. I don’t want to be burdened with debt with no income flowing in,” he says.

This gnawing fear has affected several home loan customers. Since April 2010, there has been a 2.5 per cent increase in rates till date. Every interest rate hike delivers unwelcome news of EMI or tenure increases to customers who are clearly not enjoying juggling stretched budgets, rising inflation and additional loan repayment burdens. In some cases, lenders are not just hiking the EMI but also extending tenure on the loan. Customers are now beginning to wonder whether they should look at pre-paying their loans or renegotiate terms and conditions.

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If it’s any comfort, this latest increase in home loan rates isn’t as steep as what took place in 2007-08 during the global crisis. “In recent times, interest rates have been fairly volatile. But we have seen at least 3-4 interest cycles in the last decade or so and there’s really no cause for worry,” avers Keki Mistry, vice-chairman and CEO, HDFC Ltd, India’s largest home loan company. The confidence stems, in part, from a booming market: from around Rs 8 lakh a decade ago, the average home loan size hovers around Rs 20 lakh today. Indians, being debt- averse, typically also pay off their loans within a 7-9 year period.

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However, given the uncertain economic conditions, customers are waking up to the fact that they might have over-extended themselves a bit. Several banks and housing finance companies have been known to aggressively market loans up to 85-90 per cent of the value of the asset in the past. In other cases, ‘teaser loans’, started by banks like SBI (where the rate was fixed at an attractive rate for 2-3 years and then linked to the actual market rates for the duration of the loan), are to blame.

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Burdened by rising EMIs or extended tenures, customers are often reaching out to their lenders to either renegotiate loans or rework repayment schedules. Should you? Recently, the National Housing Bank (NHB) issued guidelines that housing finance companies should not penalise customers for pre-paying loans. The Reserve Bank of India is considering following suit for banks too. When this happens, financial experts like Apnapaisa.com’s Harsh Roongta feel customers would find it easier to shift to another lender or renegotiate the loan on better terms.

There’s a caveat, though: at present banks and some lenders levy conversion fees, pre-payment penalties and/or loan transfer penalties. These are likely to go once the market becomes more competitive. For now, financial planners advise that these factors are considered carefully before renegotiating a loan. “I would typically advise clients to get out of the loan as soon as possible. Given a choice, if you can afford it, always go for higher payments rather than longer tenures. Customers with multiple liabilities should look at their assets closely,” points out Gaurav Mashruwala, financial planner.

Aparna Ramachandra, managing director of RectifyCredit—a company that helps people with lower credit ratings secure loans—has renegotiated two home loans for her clients in the last three months. “Customers have been receiving letters from lenders who have decided to increase the EMI or tenure or both without asking the customer what they would like. At the same time, we have found if the customer goes to the lender and honestly communicates an issue with repayment, they are willing to sit down and find solutions,” she says. Typically, most banks and housing finance companies don’t even offer consumers a choice between increasing EMIs or the loan tenure.

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The RBI is looking into the principles governing transparent and non-discriminatory pricing of credit. NHB too is looking into uniformity of rates for new and existing customers. Earlier this year, the RBI introduced the base rate (a rate below which banks cannot lend) system to bring in transparency in lending rates. So now customers can compare the base rates between lenders and understand what they are being charged over and above the base rate.

So far, it hasn’t done much to remove the arbitrage between new and existing customers. “The rate hikes are a burden to existing customers because they end up paying a much higher rate of interest than a new customer,” says Suresh Sadagopan of Ladder7 Financial Planners. Financial advisors say that there is nothing stopping customers who have a good repayment track record from going to a lender and asking to be converted to a current rate that is offered to a new customer. But the real impact will be seen once the market gets competitive and interest rates start falling. “That’s when charges will stop being a deterrent and customers who are aware will be able to make better choices,” avers Roongta.

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So are floating rates a bad thing? Not really. Frankly, if you are looking for credit to buy a home, you’re only likely to have access to a floating rate in these volatile times. Floating rates work on the law of averages. So over a period of time all cyclical changes even out. But that’s the theory: it’s crucial that customers stay aware of what they are being charged. The rules of the game are still not in their favour.

Of course, it’s useful in such times to repeat old truisms that many Indians have forgotten. Don’t jump on the home loan bandwagon especially if you are close to retirement, have a job in an uncertain sector or have multiple loans. As far as possible, stick to the old school and avoid a debt trap by repaying whatever you can as soon as you can. That’s the only home loan recipe for these interesting times.

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