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Thursday, April 21, 2011

Middle class dream of house property - the loan and the ever increasing ROI

Do you have a housing loan (floating !) – did you care to  notice the hike in the rate of interest.  What does this mean to you ??

For most people, buying a home would remain the most decisive and the moment one dreamt off for long.  Decades back, there was a Balu Mahendra film titled ‘veedu’ starring Archana which was all about the middle class person dreaming to buy a house of their own.  There have been regular comedies based on the theme of ‘middle income persons’. The S Ve Shekar / Prasanna / Crazy comedy ‘crazy thieves in palavakkam’ was all about a person buying a house in the outskirts of the city and ending up facing a group who kidnap a boy and take shelter at that forsaken place.  It is another fact that the same location thence mentioned as forlorn has risen magically.

Certainly this is no write-up on whether to invest in a house or how to fund the same.  Many of us have bought houses / property availing loan from a bank or any other financial institution.  People used to check the credentials and ended up burning their mid-night oil.  To me, it was simple – you are the recipient and you need not worry too much on which institution is funding – simply within all para meters of legality, you should be taking from the one who lends cheapest i.e., one who charges the least rate of interest.  Of course there could always be strings attached.

There primarily exists two ways : Fixed – where the rate of interest is fixed over the no. of years that you have agreed to repay. There would be no surprises.  The other alternative is the ‘fly-trap’ – floating ROI.  Sometimes, you may not have options as some now a days have only floating.  It is otherwise called adjustable, variable or flexible interest rate loan.  Whatever be the terminology, here the interest rate on your loan will keep changing depending on how the rate in the economy is moving.  

In this, the Home finance company will decide upon a base rate known as floating reference rate.  This is generally based on their internal base rate called the Retail prime lending rate.  The interest rate that you are fleeced will be benchmarked against this internal base rate.  

The home finance company will decide upon a base rate -- known as the floating reference rate. This is generally based on their internal base rate (which every finance company has) called the retail prime lending rate. The interest rate on your loan will be benchmarked against this internal base rate.  Some of the financial institutions have their own standards on how often the interest rate would be changed.  It could be year, 6 months, quarter or even less !  The more frequent a change, the closer it reflects the economy.  

You certainly know but would still not know it fully – there are two essential components of repayment :  “The tenure and the EMI” .  When the base rate increases, the interest that you pay on your loan gets revised and this would result in either ‘increase in EMI’ – where you would feel the pinch instantaneously if you are running on a budget.  Otherwise, your tenure would increase and you would end up remaining a debtor for more no. of months, if not years – this some of us fail to notice.  Think immediately and tell whether you know the final month on which your loan would get extinguished … unlikely that you remember.  
Recently, the Reserve Bank of India has increased the rate of interest as also the short-term lending rate & short-term borrowing rate.  The Cash Reserve Ratio (CRR) remains unchanged as of now  @ 6% - it is the amount banks are required to keep with RBI in cash.  In order to tackle inflation, the increase in interest rates have been occurring quite frequently in recent times.  

Whatever be the option of repayment : fixed / variable – you would be repaying in Equated Monthly Instalments (EMI) which is a calculated schedule where you spread your payments over multiple periods.  In this process of repayment of debt known as ‘amortization’ a portion of each payment is for interest and rest is towards balance.  By this, one would be paying the same amount every month – the catch is at the earlier stages it is more of interest and when you go for a pre-closure you would notice that the principal has not diminished much.

So do check with your financial institution on : the rate of interest that you are charged, the EMI, the balance tenure and the last month of repayment.  Most likely that the ROI would have increased and either your EMI or the tenure has gone up.  In such a situation, do check whether your financial institution has any plan whereby they take care of the spread meaning – they reduce the ROI to you as a special customer on payment of some charges…………….

Regards – S. Sampthkumar.

1 comment:

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