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Tuesday, Aug 12, 2008
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Tamil Nadu

The changing face of home loans

Home loans are getting costlier and the ones suffering the most are the middle income group, writes A. SRIVATHSAN

Photo: K. V. Srinivasan

Increased burden The hike in interest rates and EMIs

One would have hardly imagined that the interest on a home loan availed in 2004 would, in four years time, double and seriously affect repayment.

Even as recent as November 2006, the home loan interest rate was 9 per cent and did not appear expensive.

Consumers who borrowed Rs. 20 lakh at 9 per cent fixed interest rate then would have planned for an EMI of Rs. 25,340 spread over 10 years. In less than two years, the interest rate has climbed to 14 per cent and the EMI to Rs. 31,060 (CanFin Homes Ltd interest rates) — an increase of Rs. 5,720 every month.

If some have not registered this change because they continue to pay the same EMI, surprise is in store when they visit the bank — the loan tenure would have been increased to make up for the difference. Those who had taken a 15-year loan at the age of 45 would find this eating into their retirement funds.

It is too early to say if the hike in interest rates has created more home loan defaulters, say some bankers and home finance company officials. Though many admit that the home loan take-off has reduced in the last few months, there is no crisis. The high income levels and the low average age of the borrowers contribute to this optimism.

Borrowing young

The average age of current borrowers is about 34. Mathew Joseph, Regional Manager, HDFC, says that the average age of the borrowers is coming down by one year every two years.

The typical salary profiles of those who have availed of loans above Rs. 25 to 30 lakh are those who earn Rs. 50,000 a month and more. To this salary group, the current rise in interest rates is only marginal. The average salary of those who have availed loans of Rs.15 lakh and below is Rs. 25,000 a month, says an LIC housing finance official.

Many Indian customers are “loan-averse” and though they avail the loan for a 15-20 year period, many repay the full amount, on an average, in seven to eight years, says Mathew Joseph.

Averse to loans

They are high on savings and repay their loans quickly. An official at LIC home insurance also confirms the same.However, the maximum time allowed for home loan defaulters is 90 days cumulatively.

If a borrower fails to pay the instalment, banks and home finance institutions can take action. By evoking the Security Interest (SRFAESI) Act, the property can be attached and loan amount recovered in a short period. “But we seldom do that,” says an official. “We wait and the process can take more than 12 months before we get to that stage.”

The common reasoning among home loan finance companies is that the property value is increasing and any increase in interest rates and repayment is amply covered by the rising value.

Repayment woes

Though this may be theoretically correct, those on lower salary levels find the rise in repayment alongside the rise in cost of living difficult to manage.

What some of the financial institutions are reluctant to discuss is that the bulk of their loan disbursals are given to those in higher salary slabs.

To those who earn less than Rs. 20,000 a month, the high costs of housing and the high EMIs, if they were to borrow at current interest rates, are doubly daunting. An LIC housing finance official points out that properties valued more than Rs. 40 lakh will find less takers in the days to come.

Interest rates may not come down till inflation levels are down. As inflation climbs, the Reserve Bank of India will step in and increase the lending rate to the banks, and the banks, in turn, will increase the rates at which they lend to customers.

The high interest rates, it is hoped, will make loans costly and correct the circulation of money that is used up for buying goods. At present, inflation is climbing and has crossed 12 per cent.

When it touches 13 per cent, as already indicated by the Finance Ministry, we can expect another round of increase in interest rates.

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