LoanRaja Blog- Personal Finance Guide

From the days of having 2-3 jobs on hand, ITES employees are facing the challenge of chasing non-existent jobs. Get wise with your life management in tough times

A couple of generations back, the biggest worry of your career was landing a job. And then, one was more or less assured of security for the next thirty-five years or so until retirement. Today, your stability depends not just on you, but your company’s financial health and practices, the state of the economy as a whole, and the state of finance of the company’s customers and the economy of their home countries. To drive home the point is the latest Nortel development.
An announcement made half way across the world can shake up our markets, and for some, shake up careers and personal lives too. The dust has hardly started to settle down on the Satyam storm, and we already have something new to think about – the Nortel bankruptcy filing. Nortel has filed for bankruptcy, chapter 11 — meaning that it has asked for credit protection from the US Government to settle dues while it restructures itself, a little like our BIFR (Bureau for Industrial and Financial Reconstruction).
Indian IT stocks promptly fell between 2-5 percent in reaction to this news, mainly because Nortel has been one of the large outsourcers of IT to India. In fact, it was also one of the first companies to start outsourcing to India and practically every outsourcer is a vendor to Nortel.
Other than Sasken, which depended on Nortel for ten percent of its revenues, companies have said that their exposure was too little to make any significant financial impact. But that is in percentage terms. In absolute terms, 0.5 percent of $ 2 billion (Infy revenues) is around $ 20 million, while Wipro’s annual revenues from Nortel is around $ 25 million. Even if Nortel pays off all its outstanding dues, future business is likely to be much lower. Sasken had around 300 people on Nortel projects and if one assumes that the others too had anywhere between 250-400 people, then it is that many jobs lost for the Indian IT industry.
There is nervousness across companies about more nasty surprises, given current economic conditions.
Suddenly, the IT industry is not as coveted as it used to be, as the downsides to the industry are being unfolded practically every week. Youngsters have been reported to be declaring that it was far better to join the good old stable government sector, rather than live with the uncertainty. A friend said that her brother-in-law in the US routinely checks his mail on Sunday evening to make sure that he had a job to go to on Monday morning!
However, the uncertainty is not going to go away and we simply we have to learn to live with. A few golden rules to keep in mind:
Do not give in to panic: Assess your situation. If you see your company floundering or fear for your job, start looking around before you are forced to. Remember also that some things are completely unexpected, like the Satyam fiasco. These are beyond your control and not worth worrying about.
Prioritize your financial needs: In happier days, you might have bought a car, refurnished your home and upgraded your television set all at once. Focus on the most important need and work downwards.
Gather as much information as you can about all available options: There are enough websites, newspaper articles, and consultants offering financial advice. Look at various options and choose the one that suits you best.
Spend wisely: As long as you spend only that which you know you can afford, you are safe.
Invest for the future: This period of economic slowdown is only temporary. Invest wisely for the future, whether it is in a house, a car, education, or stocks and mutual funds.

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?

Low home loan interest rates which had contributed to the real estate boom during the past few years are now spiraling upwards upsetting the calculations of borrowers. Higher interest rate means a higher monthly payment to the financial institution or an extended tenure for repayment. Coupled with escalating price of properties due to higher input costs the rate hike has compounded the woes of a homebuyer. The recent RBI steps like hike in CRR and repo rates to bridle inflation have forced banks to raise interest rates on home loans.

Some banks have already asked borrowers to pay the differential interest as a single sum by the end of the financial year. Others have increased the loan tenure. When the housing loan rates were 7 to 8.5 per cent banks vied with one another to slash it down further to woo customers. Interest rate that remained as low as 7 percent five years ago has more than doubled now. Some banks have only raised their floating rates. Some have increased the processing fees on all loans. It is a tricky situation for borrowers.

Impact on EMI

For a .5 per cent hike in the home loan rates, the borrower will have to shell out anywhere between Rs 25 and Rs 35 per month extra on every Rs 1 lakh borrowed. The EMI is calculated based on the interest rate, loan amount and term. On a home loan, the EMI for a Rs. 20 lakh loan at 13 per cent for 20 years is Rs 23,432. If interest rate goes up by 1 percent EMI is Rs. 24,871. Additional monthly burden is Rs.1439 and yearly outgo Rs.17,268 more. EMI has two parts — the principal and interest. The money that goes into the interest component will be higher. When interest rates rise the interest component of the EMI too increases and the principal repayment component comes down. Borrowers who have opted for floating rate are the worst sufferers during interest rate hike.

How can borrowers beat the inflation? It is always better to pre-pay the housing loan if extra cash is available with you. A customer can liquidate fixed deposits if any to prepay the loan, as the yield will be lower than the interest on home loan. Before opting for prepayment a customer has to ascertain whether the loan agreement has any clause on pre-closure penalty. Charges vary from 2 to 3 per cent. Another disadvantage is that the income tax benefit available for repayment of interest up to 1.5 lakh per annum won’t apply in the case of foreclosure. SBI is one of the banks that charges no penalty if the loan is pre-closed from own savings or windfall gains.

Part-prepayment

Another option is part pre-payment to help reduce the loan tenure and interest rates. This can lower the EMI and thereby limit the interest cost. The problem of penalty on pre-closure of home loan can be got over by resorting to partial payment of principal amount as no bank levies penalty on part-prepayment. It is tempting to migrate from floating rate to fixed rate. But this also will invite a charge. Besides, genuinely fixed home loans for long term are not available now.