Questions you need to ask your financier
Find out why it is important to get detailed information about your home loan
Our new client, who came in for financial advice recently, mentioned the loss he suffered on his mutual fund investments of ` 15 lakh. He had made systematic investments in equity mutual funds as per the advice of another financial advisor.
While going through his profile, we noticed that he also availed of a home loan of ` 75 lakh three years ago. Besides knowing that his EMI was around ` 74,000, he had no idea about the loan amount still outstanding as well as the interest rate he was paying. He was unaware that his lender had increased interest rates but was not sure about the interest rate being charged to him. A little research showed us that the interest rate that he was currently paying was 12% and the only reason he was not aware of this was because the lender had kept his EMI the same and just increased his loan tenure.
He was aware of his mutual fund return statements but was completely clueless about the price he was paying for his home loan. He then spoke to his existing lender and got a substantial rate reduction.
There may be several others who are unaware of the actual sum they end up paying while repaying their home loan. Do you know the interest rate that you are paying on your home loan? Very few people know the actual rate. When the same question is posed to mutual fund investors who invest through systematic investment plans(SIPs) – a significantly higher number are aware of the returns that they are getting on their mutual funds. So there is a strange dichotomy between SIP investments and loans, though in both cases the installment is debited to the bank account automatically every month.
It is perhaps the voluntary nature of SIP payments (which can be stopped at any time without any penalty) as well as the fact that the interest rate is not visible in the EMI that the changes go unnoticed. There is no immediate pain when the interest rate on your home loan is raised since the EMI remains the same. You tend to ignore the communication (letter/email/ SMS) that you receive informing you about the rate increase (now mandatory as per regulations).
Banks started this practice of increasing the tenure rather than the EMI from practical considerations because repayments are being made by post-dated cheques and getting fresh postdated cheques as replacement for the old cheques is a herculean and expensive task. When the repayment mode shifted to the ECS mode, the practice just continued.
Whenever banks have been forced to increase EMIs due to the quick increases in interest rates in the past ( despite the costs involved) they have seen increased consumer activity to shift their loans to cheaper lenders. And it is always consumers with better profiles who shift their loans to competition.
Both the regulators (RBI and NHB) have officially acknowledged the pernicious market practice of Indian lenders to charge higher rates to existing home loan consumers while providing lower rates to new consumers. The regulators were forced by public opinion to ban the charging of pre-payment charges to provide some respite at least to the more aware and active consumers.
Now they can do more by mandating a change in the default option when interest rates of the lenders change – the default option should be to change the EMI amount due to change in interest rates. This is good for l enders as well since tenures will not elongate (thereby increasing credit risk for the lender) and as the consumers will be signing the ECS mandate, they are likely to be sensitised to the fact that EMIs can rise as interest rates rise. Of course consumers can always talk to the lenders and revert to keeping the EMIs the same with change in tenure. And if the rates reduce they will actually see more cash in their hands because of reduced EMIs. The author is CEO, Apna Paisa. Apnapaisa is an online marketplace for loans. He can be reached at firstname.lastname@example.org.