Interest rates on loan can be changed, easily. Just read the agreement.

In case of floating interest rates, take rate change for granted. I read a clause in a home loan agreement of one of India’s largest private sector bank. The clause is that this rate of interest is linked to what is known as its Floating Reference Rate (FRR). And, the bank holds the right to change it at its sole discretion. The bank also holds the right to increase or decrease the EMI at its sole discretion. It’s called adjustable interest rate anyway!

What about fixed rates? I have read that banks do offer something called a fixed rate but then there is a rest clause attached to it. In the agreement terminology, it is known as “Fixed rate of interest with money market conditions.” (This is how ‘fixed’ your interest rate really is). The clause in the agreement goes something like this:

“From time to time, ___ Bank may, in its sole discretion, alter the rate of interest suitably on account of change in ___ Bank’s internal policies or if unforeseen or extraordinary changes in the Money Market Conditions take place during the tenure of the Facility. Thenceforth, the rate of interest varied as aforesaid shall be applicable to the Facility.
___ Bank shall be the sole judge to determine whether such conditions exist or not. If the Borrower/s is not agreeable to the revised rate by ___ Bank then within fifteen (15) days of the receipt of the notice from ___ Bank intimating the change, the borrower (s) shall be entitled to ___ Bank to terminate the Facility and prepay Facility and all the amounts due to ___ Bank in full in accordance with the provisions of the Facility/Agreement relating to prepayment.”

Basically, the bank allows it unlimited wriggle room to increase rates as and when they damn well please. Not that they do that, but they have legal immunity built in because of the clause.

My friend in Bangalore is a builder. Steel and cement prices are going through the roof. He says that banks have money but are unwilling to lend (Don’t look at me, I am just the messenger here.) Major construction sites are all downsizing their workforce, working with a third of required workforce, cashiering the rest of them. It isn’t pretty.

Anyhow, while discussing all this, he gave me his personal take on the housing market over there.

The average software professional (mid to late twenties) earns about Rs. 40000. Along with the spouse it is Rs. 80,000. Subtract 20000 toward household expenses. Another 10000 towards the car loan. Subtract another 10000 on credit card dues and/or personal loan EMIs. That leaves them with Rs. 40,000 to spend on a house of their own. It follows that the Rs. 35-40 lakh flat in Bangalore is the upper limit of capability for the average couple.

I asked him, what about the single dudes who aren’t married, how does he intend to sell stuff to them? How’s he gonna get them to get married?

My friend is opening a marriage bureau.

Interest rates have been rising ever since this year began. Even during 2007, there were continuous fluctuations in the interest rates of home loans.

Another development that took place was banks offering lower interest rates on housing loans to new customers.

To deal with the hike in interest rates and get the benefit of reduced rates (which were for floating rate loans exclusively at one point in time!), most consumers decided to pay off the loans with existing banks and transfer loans to banks offering cheaper loans…

All’s well till this point. What happens when one transfers a home loan from one bank to the other is that certain charges are payable, one of which is the prepayment penalty. Banks charge this fee to compensate for the loss of their income from the loan. The question here is, is it justified?

To me, personally, it is very unfair of the bank to charge a penalty to a consumer who is just trying to save his money. For one, most banks do not reduce interest rates for existing consumers; the newer ones are known to get lower deals. So, the option left for such a loan consumer is to transfer the loan. Other consumers may opt for a loan transfer because they think that their lender is charging higher rates as compared to the other lenders in the market. In both the cases, it does not seem fair on the part of the bank to charge a prepayment penalty.

But, to look at it from the bank’s point of view, the charge of the penalty seems completely justified.

We all need a home and a loan for our home…no? Well, as a matter of fact we all resort to borrowing from legitimate lending institutions such as banks and housing finance companies when we want our ‘dream home’.

I agree that the phrase I just used is hackneyed, but never ever has this phrase sounded so true. The inflation is rising as ever…

To add to the list of woes is the alleged cartelization of the cement and the steel industry….even vitrified tiles! So, well, buying a house without a loan is difficult if not impossible…and yes, the loans provide tax benefits too…

There is one major input for a house which remains a cause of concern constantly…seems since ….land prices. The prices seem to be going vrrrrrrrrrrrrom…higher and higher eternity and higher…

In the last few months we seemed to heave a sight of relief when newspapers and magazines quoted industry experts and analysts saying that that the much awaited price correction in the real estate market had finally come through. Newspapers reports said that real estate prices had fallen by 15-20 per cent compared to the past few years…blah, blah, blah…

But hey wait, the experts also said that luxury housing (whatever it is!) is an emerging trend. Will someone tell me what is this ‘emerging’ concept when buying a house for a common man is a luxury in itself… If you think I am kidding, visit the nearest real estate agent and play house-hunting…just for a first-hand experience you see…

You will wonder why am I whining away…Aren’t these known facts? Someone will also point out to the recent Sixth Pay Commission hike that is due… (peanuts I say!) to the public-sector employees ONLY… Yet another will want to point out that the salary packets that we take home now are heavier courtesy the employment with MNCs…

Gimme a break guys, what hike? Well, what makes me want to write this bit is because of some sign boards I saw…in a faraway place called Vasai…

For those who do not know the geographical location of this suburb (er…hmm?), it’s close to Virar…well after Dahisar. Hm, right, Bassien, Vasai Fort, Former Dutch colony…right…right…

So, well to come back on track, I saw these sign boards of someone called Rashmi Builders (don’t get me wrong, I got nothing against them). The signboards seem to try and justify the hike. What hits hard about the issue is that affordable housing is what is ‘in’, in these areas. It hurts when you have to pay what seems like spending a fortune in buying a place here. Yes, small suburbs beyond, say Borivali, have become really expensive…and now it seems, justifiably so!?

Loans are generally assumed to be a risky liability as the generally individuals avail loans more than what they can bear. A loan, by itself, is never risky; it is only by the improper utilization and improper budgeting, the problem starts. An individual perhaps forgets that the way he wishes to earn interest on his investments, he also has to pay interest on his liabilities.

Loans availed can be judiciously used also to save taxes in an efficient manner. Some of the tools are:

Interest portion of home loan
The first and the foremost tax sop is the interest amount that you pay on housing loans. The interest on housing loans in the initial years is the major component of the EMI you pay. The interest may exceed the rental income from house property, resulting in loss from house property.

The interest payable (accrued and not paid) of a home loan is eligible for deduction under section 24(b) of the income tax act as “interest on borrowed capital”. The interest deduction is Rs 1,50,000 (if the loan/property acquired after 01.04.1999) for a self occupied property. For let out property/deemed let out property, the actual accrued interest is deductible without any limits.

Principal portion of home loan
The principal portion of a home loan is eligible for deduction under section 80C of the income tax act. The criteria being, the assesee has to obtain a loan from an eligible financial institution/bank and the proceeds has to be used for the construction/purchase of a house property, which is subject to income from house properties. The maximum amount of deduction is Rs 1,00,000 under section 80C. But the deduction will be taxable in case the property is sold within 5 years from the date of construction/purchase.

• The house property shall be registered in the name of the person, who intends to claim deduction towards interest and installment.
• In the case of working couples having substantial taxable incomes, it may be worthwhile to register the housing property in the joint names and take separate housing loans to claim deduction of interest and installments.
• The EMIs may be planned in such a way that the payments towards principal part of the loan do not exceed the limits available u/s 80C.

Interest portion of education loans
Section 80E of the income tax act provides for deduction in respect of repayment of the loan taken for higher studies. For the deduction, the individual should take a loan from a financial institution or any approved charitable institution. Secondly, the loan should be taken for higher education and for the assessee himself. However, higher education means full time course for graduate or post-graduate courses in select fields. The amount eligible for deduction is the entire interest amount. The deduction is available for eight assessment years starting from the assessment year in which the assessee starts paying the interest on loan, or until the interest is repaid in full, whichever is earlier.

While individuals lose sleep over paying the EMI’s after availing a loan, seldom they know that the loan can be used as an effective tool to reduce tax.

Considering a hypothetical example,

Total principal paid during the year – Rs 3,00,000
Total interest paid during the year – Rs 1,70,000
Interest on education loan – Rs 30,000

The total maximum deduction available will be Rs 2,80,000. Assuming the assessee is taxed at the maximum marginal rate i.e. 33.99%, a tax outflow of Rs 95,170 is saved.

Thus, loans can do more good than bas if utilized judiciously. Living without loans is tough, so utilize it effectively while you can!

The author is a Certified Financial Planner, working as Senior Manager with Mumbai-based SRE Financial Planners.

“To be, or not to be, that is the question.” Shakespeare wrote this line underlining the dilemma faced by his Prince Hamlet. He could as easily have been writing about today’s home buyers. The dilemma of whether to be a home owner or not means that the potential home buyer is sitting on the proverbial fence in a trance-like state trying to make sense whether it is the right time to buy a house or…

The home loan is the biggest component of any house purchase and any change in home loan interest rates affects the decision to buy a home. Till recently (2006-07), exploding property prices and rising interest rates were the major dampeners to buying homes. In the last few months of 2007, banks had reduced the interest rates between 0.5-0.75 percentage points to no discernible increase in demand for home loans given the exorbitant property costs.

So what does the rest of 2008 have in store for you, the ardent home shopper?

The first quarter of 2008 has been quiet where property purchases are concerned. The present quarter also promises to be underwhelming, which is followed by the traditionally slack July-September quarter. For any sign of life, you will have to wait till fourth quarter of this year.

HOME LOAN PREDICTIONS 2008

• Interest rates unlikely to decrease, may increase
• Property prices may soften
• Demand for home loan to be soft
• Slack period till September 2008
• Rising inflation to affect interest rates
• Mortgage guarantee to come in effect

It is expected that property prices may continue to soften but are unlikely to nosedive.
Though this softening may trigger a few purchases, it actually may give rise to purchases being postponed. Home loan buyers might expect them to fall further, resulting in a wait-and-watch attitude - wait for property prices to fall further and watch at what price they can make the purchase.
We therefore expect that demand for home loans will be soft because the downward correction in property prices may not finish during this year.

In the case of interest rates, these are not expected to decrease any further; in all likelihood they will increase. A bank’s ability to bring down interest rates on housing loans is not just a function of housing stock demand-supply. Interest rates are also determined by other factors affecting the overall economy

The promised banking liberalization in 2009 should see some more transparency come into the market due to a combination of increased regulation and competition. Hopefully we shall see regulation that ensures a more transparent basis for adjusting floating rates; thus making its movement both ways rather than just one way (upwards, as it is at present).

Also, we should see the first of the licenses granted to a credit information company (popularly called a credit bureau). This will increase the economic incentive for customers to pay their dues on time; defaulting financial obligations would result in the customer being blacklisted at the credit information company.
Another factor which will impact the property loans market is the introduction of the mortgage guarantee. Banks and home finance companies would like to get risk cover on home loan defaults. The National Housing Bank (NHB) is setting up a mortgage guarantee firm as a joint venture with global financial institutions to provide risk cover to lenders against defaults in housing loans. The NHB is in talks with global partners such as the International Finance Corp (IFC) and the Asian Development Bank (ADB) for the venture.

All things considered, 2008 is likely to be a wait and watch year as far as residential property and home loans are concerned.

Harsh Vardhan Roongta is the CEO of apnaloan.com.