LoanRaja Blog- Personal Finance Guide

Home loans have been the flavor of the week with best rates for home loans— the finale being delivered on Monday, the 15th of December; when public sector banks announced reduced rates for home loans. Is that good news? Or are there any catches to it? One quick look at the balance sheet for home loans, as it appears now.

On the plus side:

• Housing loans are down with immediate effect to 8.5 % for loans up to Rs.5 lakh and 9.25 % for loans up to Rs.20 lakh.

The package effect does not include the above Rs.20 lakh category, but given the CRR and repo rate cuts, bankers believe that prime lending rates for not only home loans but all loans will drop anyway.

• The home loan package is only for public sector banks. But the private and foreign banks – which offer loans in the 13- 17 % range — may follow suit, partly driven by the market and partly to get a share of the sub 20 lakh loan segment, which is known to be a segment of high recovery. There are already reports of private banks taking a re-look at their interest structures.

• Borrowers will have to pay less margin money on home loans (that is the amount they need to pay upfront) which has been brought down to 10-15 % from 20-25 %.

• EMIs are not likely to change for five years, going by the announcement made by the PSBs. After that period, borrowers may be given the option of going in for fixed or floating loans.

• No processing and pre-payment charges and free life insurance cover for borrowers

On the plus side, the cut in rates by PSBs may force the private and foreign banks to follow suit. Today, the private banks are in the 17% range. However, the PSB’s generally cater to the sub 20 lakh loans.

 Competition from the package will see housing finance companies review their interest rates.

On the minus side

• Home loans flavor is only for existing borrowers. After all, the intent behind the scheme is to stimulate the economy, particularly the cement and steel industry rather than benefit for individuals. Still if interest rates fall, it is only a matter of time. (Overall, a plus)

• Banks may take a hit on home loans margins, but it is not expected to be for long. They will make up from gains in treasury, say bankers.

• Can’t see anything else?

The stock market too has reacted with caution but positively. Stocks in the banking and finance, cement and construction, engineering and capital goods industry have all gone up.

If the sub Rs 20 lakh segment picks up, it is a positive trend. This segment is known for the high rate of recovery, so will it attract builders who were so far focused on the higher end of the market and the commercial sector?

The other thing to watch out for is that a lot of builders have lost money; homes going vacant, being sold at discounts and a continuing cash flow problem in the industry, this is the time when builders may cut corners, put quality at risk.

The sub 20 lakh homes would be impossible to find in metros, and very difficult in larger cities. Will this package see more homes moving to suburbs, or to smaller towns and villages? Any views?

When a slowdown comes, can stimulus packages make a difference to India’s current affairs? After the US, EU and China announced infusion of huge amounts of money to get their economies kick started again, it was India’s turn to do the same.

Of course, apart from the economic downturn where everyone talks about India’s current affairs (which in our case was really not as bad as that of the others), we had the terror attacks to add to the gloom. No wonder then, that the Government announcement on Sunday of a Rs 20,000-crore package was met with more than warm enthusiasm. If you have not seen the videos search it on Youtube to know the actual India current affairs.

The initial reaction has been one of optimism. In response to the across the board cuts on Cenvat, automotive, consumer durables and IT hardware industries have already announced intentions to pass on the benefits. So, one can look forward to cheaper cars, white goods and electronic items.

Speaking about current affairs, fuel prices are also down, though only marginally, compared to the global price fall, but indications are that it will go down further.

In the last few months, the RBI has tried every trick in the book to increase liquidity in the market through monetary measures.Even the Sensex, which had refused to come out of its dumps, has brightened up a little.

So what stands as focus during such current affairs? For India the package is focused on three areas; mainly – manufacturing industry, housing and public expenditure. Most manufacturing industries had cut back production.

The 4 percent cut in Cenvat is aimed at setting in motion the cyclical growth process once again. A cut in prices should see an increase in demand, which in turn will lead to an increase in production, an increase in trade and an increase in jobs, increase in amount of money with individuals and therefore an increase in spending power.

It is the same theme that runs through the RBI’s monetary measures to infuse liquidity, though those measures did not see the expected impact.

The affordable housing sector has been one other clear area of focus as banks have already announced cut in rates. Public sector banks are also expected to announce new packages for borrowers of loans in the Rs 5-20 lakh range. This is targeting the middle and low income categories specifically, while also trying to revive the housing industry, which is a large employer of labour.

The largest part of the package is the additional Rs 20,000-crore Plan expenditure. More money is expected to be poured into public infrastructure projects. However, this is the sector that has also attracted the largest amount of criticism. Historically, public expenditure has been equated with leakage, corruption and misuse of funds. Will the money really go into the works as announced is one doubt.

Assuming that this really works out, then public expenditure should spur on private investment and set the entire economy rolling again.

All the new measures will keep the growth rate from slipping below 7 percent. The growth rate has dropped from 9 percent last year, as a result of the global slowdown. In fact, critics have started pointing fingers that the growth rates in the case of Indian economy would be muted in the coming few quarters. What has also added to the skepticism is the fact we are staring at general elections in less than two quarters. Typically, in an election year, you don’t expect to see fire brand economic politics or push towards reforms. However, the recent concluded assembly elections and the public pressure in the aftermath of terror attacks might push the government to speed up its reform process. The economic stimulus package is a reflection of government’s thinking and let us hope that political parties are forced to try their hand at revival of economy for their own good.

These are tough times for investors and the choice of investment product has become challenging. One good alternative that stands out is HDFC unit linked funds; while not many have the funds to worry about investment options, HDFC stands out because of the liquidity crisis and uncertain economic conditions; there are some good options for those sitting on cash. While insurance in general has become more appealing than earlier, there is an interesting product from HDFC Standard Life. The HDFC unit-linked wealth maximiser plus, is a scheme which can be considered by those sitting on larger corpus.

As the name suggests, HDFC fund is a market-linked product offering both insurance and market-linked returns. However, the premium in HDFC option is restricted to one time and hence investor will have to look at parking larger corpus. Some of the interesting features of the HDFC product are lower allocation charges when compared with ULIP, tax-free maturity benefit and the advantage of life cover up to 99 years.

To put the HDFC product features in a nutshell, maximiser is a single premium insurance plan with ULIP features. Hence, an investor gets to choose the HDFC fund for his premium amount and also can decide on the life cover. However, the cover is only for a maximum of 5 times unlike an ULIP which allows as much as 40 times, subject to age of the investor.

As a result, the HDFC product can be another alternative option for an investor looking for term plan or pension plan. In the case of term plan with guaranteed premium, the investor gets back only the premium paid by him. For such investors, the maximiser can be a better option as it also offers the potential of appreciation. Take for instance, an individual looking for a cover of Rs 25 lakhs. This investor can look at a one-time premium payment of Rs 5 lakhs under the HDFC Maximiser and can also hope to earn over and above the premium contribution. In a pure term, either he will have to go forego the premium or opt for return of premium. Also, the cost of a term plan depends on the term which is not the case under the HDFC Maximiser product as an investor can enjoy the life cover up to 99 years.

It can also be an alternative for pension planning as the HDFC fund offer the freedom one time payment. Since the investor has the option of keeping the life cover to a minimum of 1.1x of the premium amount, the cost towards the HDFC policy can be lower. For instance, if an investor chooses to invest Rs 25 lakhs at one go, he can keep the life cover to the minimum, as he would be able to earn higher returns from the investment.

The biggest advantage of the HDFC product is with respect to its premium allocation charges. The charges are competitive at 2% for premiums in the range of Rs 5 lakhs to Rs 24.99 lakhs. It comes down even further for higher premium payments.

The HDFC product also has other flexible features as offered by ULIP such as switch from one fund to another, flexibility of withdrawal and pre-mature conditions, etc. The only drawback is that the HDFC product does not allow accumulation over a period of time as it is a single premium product and also investor can not choose life cover beyond five times.