The year 2008 may be credited for witnessing the biggest financial turmoil in the recent past. Realty and home loans consumed innumerable reams of paper and satellite space. These were constantly in the news for whatever reasons.

As a home loan customer, these news must affect you mentally, not to mention financially.

Developments at the macro-economic level (failures of global iconic financial firms, high inflation, volatile stock market etc.) are impacting you also as a home loan customer. Increased EMIs or elongated tenure must have thrown your family budget out of gear. But if you are good borrower things are not all that bad.

If you already have a loan and your payment track record is spotless for at least 2-3 years, you should be paying interest in the range of 11-11.5%. In case you are paying more than this, it is time for some serious rethinking. You can request your lender to offer you the rate in this range. Your lender may charge a small fee for shifting your loan to a lower rate.

In case your lender seems reluctant, you can certainly consider the other option of shifting the home loan to another lender offering lesser rates. But keep in mind that this shift may make you incur costs such as prepayment fees payable to existing lender, processing fees payable to new lender, besides the administrative costs. You will be required to furnish an NOC from the co-op society or builder, whichever is applicable in your case.

As there is a time gap between switching from one lender to another, you will be required to furnish a letter from your existing lender stating that they will release the documents within a stipulated time frame after full payment is made and also specifying the amount that will be required as full and final payment. This letter will enable the new lender to consider releasing the payment directly to your existing lender.

To get the best deal, you must keep a hawk’s eye on the interest rates offered by various banks to ensure your bank is not charging you a higher rate than others. Rates can be checked at a variety of sources including the rates comparator at www.apnaloan.com. Of course this option is available only to those consumers who have maintained an excellent track record of payment on their loans.

Following the market, maneuvering, and evaluating its impact is not that easy but then these are not easy times and, as home loan consumers, we need to evaluate all possible options.

What has the RBI done?

On Saturday, November 1 2008 the RBI cut CRR by 100 basis points (50 bps effective October 25 and 50 bps effective November to 5.5%. Further the repo rate was reduced by 50 bps to 7.5%.

It also cut banks’ statutory liquidity ratio (SLR) by 1 percentage point to 24 percent of their deposits.

What are repo/reverse repo rates, CRR rate and SLR?

Repo and reverse repo rates are the tools of liquidity management. The RBI uses these measures either to inject liquidity into the system when the liquidity conditions in the markets are tight or suck out liquidity, when there is excess liquidity in the system.

Why does the RBI do this?

Excess liquidity in the system stokes up inflation. Higher inflation leads to higher prices, which in turn leads to lower demand adversely affecting the overall economic growth. In times like these, to control inflation, RBI sucks out liquidity from the market, thus reducing the money supply.
Similarly, tighter liquidity means banks have less money with them to lend, which forces them to raise interest rates. Raising rates leads to consumers postponing their purchases; businesses deferring their expansion plans, thus reducing the aggregate demand, adversely affecting the economic growth.

Thus it is the RBI’s prerogative to manage inflation without compromising on growth.

How does the RBI do this?

Simply defined, the repo rate is the rate at which RBI buys securities from the banks and lends them money. When the liquidity in the markets is tight, the RBI reduces the rate at which it lends to the banks to incentivise banks to borrow more money from them. Thus banks have more money with them to lend to consumers and businesses giving an impetus to economic growth.
Also, changes in repo rates have a direct bearing on other interest rates like your bank FD rates, home loan rates, and so on.

Cash Reserve Ratio (CRR): Banks are mandated to keep certain percentage of their deposits with RBI. This is the CRR. Thus, an increase in the CRR leads to banks parking more money with RBI reducing the funds available with banks.
On the other hand a reduction in the CRR keeps more money with banks boosting liquidity in the markets.

To put it simply, the repo rate is a rate management tool, whereas the CRR is a liquidity management tool of the RBI.

SLR: It is the amount that a bank has to maintain in the form of cash, gold, or approved securities. The quantum is specified as some percentage of a bank’s total demand and time liabilities i.e., the liabilities that are payable on demand anytime, and those liabilities that are accruing in one month’s time due to maturity. This ratio is fixed by the RBI.

What is the current scenario?

In line with its global peers, the RBI also was forced to reverse its tight monetary policy that was being followed to control inflation, to solve the problems arising due to shortfall of funds. Domestic events like advance tax payments, regulatory intervention by the RBI in forex markets to stabilize the depreciating rupee, (aggravated by merciless selling by FIIs in Indian equities) created a huge liquidity crunch in the markets. The liquidity shortage drove up the overnight call rates (rate at which banks give money to each other for short term needs) shooting up to over 20% levels. Banks raised their benchmark prime lending rate (PLR) and were reluctant to disburse loans against the sanctioned limits owing to the liquidity crunch. To cool off this liquidity crunch, the RBI in its credit policy on October 24 announced a 250 bps cut in CRR and 100 bps cut in repo rate. The cuts effectively added around Rs 1, 30,000 crore to the system. When even this was not enough to tackle the ongoing liquidity crunch, the RBI further announced a slew of rate cuts on Saturday.

• It cut CRR by 100 basis points (50 bps effective October 25 and 50 bps effective November to 5.5%. Further the repo rate was reduced by 50 bps to 7.5%.
• It cut SLR by 1 percentage point to 24 percent of their deposits.

If one considers the macro data points, the conditions for easing monetary policy appear favorable owing to:

1. Inflation showing signs of peaking out
2. Oil prices continuing their southward journey
3. Slowing economic growth

The one percentage point cut in CRR is set to release additional liquidity of Rs 40,000 crore into the system.

The SLR cut would inject about Rs 40,000 crore into the banking system.

The RBI now expects banks to pass on the benefit of rate cuts to final consumers in the form of lower interest rates on housing loans and personal loans to boost consumption and revive the slowing economy. Some of the banks have already reacted positively by proactively cutting the benchmark PLR.

Impact on equity markets:
The RBI move was a welcome trigger for the stock market, albeit a short-term one, as we saw the markets rallying from the lows of 7700 to 10600. As expected, banking stocks contributed the lion’s share to the rally on the expectation that lower rates will boost consumption demand positively affecting the margins of the banking sector. Also, a cut in CRR (on which banks don’t get any interest) and SLR would enable banks to earn higher margin on released funds.

Kapil Mokashi is an Associate Financial Planner, working with Sharekhan Ltd. as an equity advisor.

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.

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.