Read the small print
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While looking for easy loans, we face ‘not-so-easy’ issues, says K. SUKUMARAN
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PLAY IT SAFE: Clarify all points before signing the loan papers
There used to be a time when taking a decision on obtaining a loan to buy or build a house was easy. It is no longer so. In fact, it is a million dollar decision one has to take today, especially since there are very many players in the scene and the poor home buyer is at his wit’s end by the time a satisfactory conclusion is arrived at. Why this ‘snake and ladder’ game? Let us find out.
Housing was considered ‘unproductive’ before it became a ‘priority sector.’ But, the priority tag prompted lenders to come out with schemes galore to make even the middleclass and the poor own a house. The banks found this segment a very safe area to park their surplus liquidity/lendable resources. In due course, the long term loan was born, say 10/15/20 year loan. Long-term asset-liability matching concept dawned on the wise banker. Imponderables such as interest rate and cost of deposits (which is the lendable money) were cracked for acceptable solutions. The Reserve Bank too forecast economic growth, money supply etc and gave benchmarks to lending and interest rates, in the name of liberalisation.
All these brought in new concepts such as fixed rates/flexi loans/conversion inter se and the like. Many applicants could not understand the terms used in the borrowal agreements, yet signed them on trust and on the basis of ‘let us cross the bridge when we come to it’ theory.
While we were all looking for easy loans, we are confronted with ‘not so easy’ issues. For example, the last year or so brought to the fore the effect of ‘repo’ and ‘reverse repo’ and increase in CRR after the upward journey of inflation.
Hidden dangers
Some of the hidden dangers in home loans today are:
Interest rate changes bringing in revision in the rate of interest levied on the loan/s.
Fixed rate is not so ‘fixed’ and there will be increase in interest on both existing and new loans, behind your back. Further, ‘reset’ clauses take you off guard!
The flexi rate many a time is in favour of the lender and not the borrower.
Hidden charges are there for change in methodology of interest.
EMI will also go up when interest rate goes up, sometimes the period of the loan too.
The effect of increase in repo rate and the CRR has been manifold. Banks have revised the rates upwards. Every day, we learn about one bank or the other revising its Prime Lending Rate, followed by a raise in the lending rates. Some banks have raised the deposit rates as well. The burden of repayment has gone up consequent to interest hike, leading to higher EMI and even period of the loan. What prompts banks to undertake this exercise?
Banks sanction loans from the lendable surplus they have after maintaining the statutory reserves. The cost of lendable funds decides the lending rate. A senior officer heading the Asset-Liability Management dept. of a local bank says that the cost of their lendable funds is around 11 per cent. Retaining a spread of 3 per cent, the PLR has to be 14 per cent.
Increase in interest by 1 per cent, if applied for a loan of Rs. 1 lakh for a period of 20 years, will mean an addition of approximately Rs. 70 per month and for 10-year loan, it will be Rs. 60 approximately. Based on this, the EMI will also go up from Rs. 1,084 to Rs. 1,154 for 20 years and from Rs. 1,420 to Rs. 1480 for 10 years.
Constant review
The risk weight of the portfolio decides the further load. In the case of housing loan, it is a long-term commitment and none can predict the interest rate movements with some exactitude beyond 3-4 years. Banks, therefore, like to have constant review of the rates. In the case of home loans, many banks like to extend floating rate rather than fixed rate. Some banks have issued instructions to this effect and others have informally circulated the approach. Even if fixed rate is extended, a ‘ reset’ clause is included. Here again, no reset is normally allowed during the first 2-3 years.
In a situation where the fear is that inflation will increase to around 15 per cent in a couple of years, the cost of funds will also go up consequent to the various measures enforced by the RBI. In such a scenario, the banker discourages fixed rate and offer flexi rate. Why is the banker compelled to revise the rate?
Cost of funds and the deposit rate are the key factors, as stated elsewhere. Profitability of the bank’s operations, the spread, and asset-liability management are the critical areas. When a bank with 11% cost of lendable funds, raises the PLR by 0.50 % to 0.75%, and the SBI raises the PLR by 100 basis points, one can estimate their cost of lendable funds.
Where does the home loan seeker stand?
One has to understand all the terms and conditions and even the fine print in the agreement. The glossy ads and attractive offers are to be evaluated properly. Hidden charges and ‘reset’ clauses are to be clearly read and understood. Inflation and the possible escalation in interest rates should be anticipated. Don’t be in a hurry. Compare all options before concluding any deal. Save from the construction / buying cost. Repay unwanted loans. Well, there may be many more tricks of the trade which are to be confronted with. ….One is certainly at the cross roads at this point of time.
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