LoanRaja Blog- Personal Finance Guide

Interest rates more volatile? Rate cuts have become a regular affair but the consumer and banker is not enthused about borrowing or lending. Both need a bigger push from the government
In recent times, interest rates have turned more volatile than equity markets. Not surprising considering the fact that there is talk of a rate cut on a weekly basis. It is the expectation of these cuts which is keeping the Indian market swing in a wide range. If you look at some of the other global markets, the volatility in interest rates is not exciting for traders. Now, will we have a rate and if it comes through, will it get us out of the current slowdown which is all around us?

In fact, many have been complaining that life hasn’t changed in a big way after the recent rate cut which has pushed banks to cut down interest rate by 0.75%. The crib is that home loan rates are still in double digit and well above the comfort zone for many. As a result, borrowers are not exactly rushing to banks for buying property or cars.

If government is thinking of another cut in interest rate or stimulus package, it is due to the non responsive behaviour of the consumers. However, for the consumer, the problem is not merely on the rate front. In the case of property, developers are unwilling to press the price revision button having created land banks during real estate boom. As a result, you still find the property prices on the higher side as the developer is not ready to offer a discount of more than 15-25% in interest rate. In the case of cars, the story is entirely different.

So who need not worry about interest rates? Car manufacturers have been faced with the challenge of rising inventory and have begun to lower prices but the consumer is not ready to bring in a new car in a hurry. The reasons for lack of enthusiasm are plenty but top among them is the uncertain future. If the salaried is not sure if he will have the same pay cheque for the next one year, the uncertainty is of a different kind for the self-employed who account for a good chunk of car buying population at this time of the year. For these entrepreneurs, receivables are mounting and cash is turning out to be a rare commodity. With the economic recovery threatening to take more time to return to normalcy, the entrepreneurs are not in a hurry to invest on new wheels.

It is in this background one has to view the economic packages being unleashed by the government. In an election year, the government is keen on reviving the sentiment which has taken a huge beating. The uncertainty, liquidity crunch and the lack of enthusiasm among consumers to loosen their purse strings is not having the desired impact and hence, the Union government has been pushed to get more aggressive with its goodies. That’s why now you hear about income tax sops on home loans, higher investment limit for Section 80c and there is even talk of the government pushing builders to offer steeper discounts. Banks have already been told to get back to lending rather than focus on government securities. In the past few months, banks have resorted to increased scale of treasury operations. Not surprising considering that government securities have become the most profitable option for improving bottom line. The focus on treasury has been an easy option for banks in an era of falling interest rates. As you are aware, the yield from government securities goes up in inverse proportion to the prevailing interest rates and the sharp fall in the last few months has helped the yield to be in the range of over 15%. Unless there is pressure on them to get back to lending, banks may continue to rely on treasury profits for their good health. Only government has the wherewithal to push them.

Someone once observed that real estate prices can never fall. There is only so much land in the world to sell real estate, and being a scarce commodity in that sense, demand and therefore prices of land, can only go up.

Yes, there will be some ups and downs, but the land market will never crash. And in the long term, investment in real estate – land and property — can only be profitable.

However, like someone also said, in the long term, we are all dead anyway, and it is the short and medium term that affects us the most.

And in the short term, buying ability, construction prices and interest rates determine property prices to a large extent.

Right now, the Indian property market or Real Estate per se is seeing some interesting swings. For a while, it seemed as if prices would continue on an upward spiral, and a house/ flat for Rs 1crore became matter of fact.

And then, the RBI struck. Loans to housing became stringent, interest rates went up and home buyers found life tough.

Now, it is the turn of the developers to struggle. On the one hand our land prices are still high, and on the other the falling prices of homes, with home loans once again getting priority; which would mean there is still much scope as far as Real estate is concerned.

But buyers are still cautious and are refusing to bite. Buyers are skeptical to invest may it be in real estate or in any other investments. Banks too, have yet to start looking at home loans again, despite directions to do so from the Government of India. In an attempt to get the segment back on track, developer associations such as CREDAI and the National Real Estate Developers, Council (Naredco) have both urged members to cut prices on properties. Developers, who are strapped for cash, are dangling various freebies, incentives, and easy payment options.

So the obvious focus for real estate seems to be the middle and low-income group housing schemes. The high-end homes are already in oversupply. Even commercial property is lying vacant. The only serious house buyers are these looking for a roof over their heads, rather than those looking at real estate as an investment option.

One other area that is expected to gain popularity during a slowdown is the affordable or low cost housing segment – which includes homes between Rs 3-20 lakh. This is attractive to the buyers – because of the lower prices and attractive to developers, because their initial investment can be a little lower, a boon in times of a funds crunch like now.

Once demand picks up, the construction industry thereby real estate itself is expected to revive.

The next few months will see a correction in rentals – a trend that has already set in. Rents have gone down anywhere between 10-50 percent, depending on the location. In the meantime, there is a lot of vacancy – in high-end luxury apartments, as well as office space. Companies too are putting off real estate decisions, waiting for conditions to improve before making any new investments.

One point of view is that the slowdown has only been a means to bring about a correction in real estate, bringing it down to more realistic levels. Developers will continue to find it difficult to raise funds and prices are expected to fall by at least 10-15 percent over the next 6-9 months.

Investment in real estate remains a good proposition, as long as it is direct investment. Real estate equity funds have taken a beating. A lot of private equity finds from investment banks that they are not in good shape either, in the wake of the global financial crisis.

The decision to go in for a home loan has to be taken with utmost care and planning. Since it has long-term implications on the family budget thorough planning is a must. A false step can land the borrower in unexpected financial strait. Plethora of schemes and incentives being advertised by lenders regularly can confound any prospective borrower. The market is crowded by hordes of sales agents who tend to paint exaggerated figures on eligibility and interest rates.

Never blindly go by the advertisements that promise loans at very cheap rates or the sales agents’ words. He may give a false impression about your eligibility and try to persuade you to borrow more than your requirement. The first step is to make a realistic assessment on the resources you can spare every month for repayment of the loan. Then try to find out your eligibility. Not all banks calculate eligibility norms alike. Some go by the net salary while others go by gross salary. Some HFCs take into account the income of close relatives of the borrower while others include only the spouse’s income. Gullible borrowers may blindly opt for loans on the basis of false assumptions and end up taking more than they can afford.

Explore your options

Many borrowers just go to a single HFC and accept the deal they are offered there without making enquiries elsewhere. In a competitive market there is always room for a better bargain. All rates including processing charges are negotiable. Get a thorough understanding of interest rates and service charges prevailing in different banks. Try to get in writing from the lender the prevailing interest rates and other fees. Better to opt for the bank that offers the lowest EMI. Hiding details about your liabilities and assets may have disastrous consequences, as the lender will invariably scrutinize them closely. If you can prove to the lender that you have a good track record in repaying loans it will be advantageous. If you can get a pre-approval letter from the bank it will help you to negotiate better with other lenders.

Customarily, a loan agreement is weighted in favour of the lender. Some financial institutions may have hidden clauses and conditions, which may not be conveyed to the prospective borrower initially. But all these unfavourable clauses will surface in the final agreement, which may be different from what was promised. Some borrowers tend to sign on the dotted line. Never sign a loan agreement without thoroughly understanding the implications of all clauses like foreclosure charges, reset etc. Lenders generally reserve the right to revise the rate of interest at their discretion. Even if you have opted for a fixed rate loan it is not really fixed. It is vital to know what action the lender will take in the event of default. Customer should know whether any penal interest would be levied. Lenders have also a right to recall the loan at any time.

Interest rates

Loan rates are not uniform. Customers usually are in a fix on choosing between fixed rates or floating rates. They often don’t have a clear idea about the exact difference between fixed rates and floating rates. The two basic types of home loans based on the interest rate are fixed rates and floating rates. Market conditions determine the floating rate. Floating rate loans are subject to periodic review, normally every quarter. Some HFCs review rates annually. Check whether the fixed rate loan you have chosen has a reset clause that allows the bank to review interest rates. In the case of floating rate it has to be ascertained whether the interest is being calculated on daily, monthly or annual rest. Consequently you end up paying more as interest over the years in case of annual rests as compared to monthly rests, even if the interest rate is the same.