Ques­tions you need to ask your fi­nancier

Find out why it is im­por­tant to get de­tailed in­for­ma­tion about your home loan

HT Estates - - FRONT PAGE - Harsh Roongta

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 ceo@ap­na­paisa.com.

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