Sunday, February 4, 2007

Home on loan

The choice is ours whether to fix it or to remain afloat

A few years ago, when a close friend of mine took a home loan from a renowned bank, he asked me the difference between the fixed and the floating rate of interest. I quite religiously explained him that while in case of fixed interest rates he would have to pay back with the same interest rate throughout the tenure, in case of floating rate it might come down or go up depending upon the swing in the prevalent rates of interest. Those were the days when most of the retail loan rates were only moving southwards. With most of the major corporates having altogether shunned the Indian banks and their abnormal interest rates on loans, (preferring the foreign banks and public issues more for raising money), Indian banks were flushed with fund which they pumped into the retail segment with hitherto unseen interest rates. So the bank didn’t have to try hard to sell the floating rate idea to my friend. Three years down, last week when I met him and told him that I am going to apply for a home loan and if he could suggest me something, his face told the rest of the story.

The most striking feature of the Indian home loan saga is that, just like my friend, more than 80% of us have been tempted by a floating rate, as the fixed rate is always higher by a 1.5% to 2% than the former. What most of us failed to realise is that in the short run, the floating rates look attractive but in the longer run it has the potential of causing a havoc. Like in the case of those who had taken a 20 year loan in 2003 at floating rate of 7% to 7.5% would now be paying the same EMI for almost double the tenure (the next 38 years to 43 years) or for that matter, for those who had settled for a 15 year loan would now be paying for 20 to 22 years, with the hardening of interest rates (2% to 2.5% over the last three years). Thats not the end. With further hardening of interest rates the tenures would further stretch, pushing most of us into a perennial vicious debt cycle. And we stand completely helpless about it, given the number of finer clauses that most home loan documents have and which we quite regimentally pretend to ignore showing astounding faith in the words of the bank representative. Even the banks instead of informing the ‘catch’, most of them have enticed the borrowers into the magic of the floating interest rates as if one day they would be near zero. It isn’t for nothing that the home loan market is one of the most lucrative segments of the entire retail basket and has grown to almost Rs 2,000 billion market. And they are pretty confident that even if the rates keep on increasing, we, the middle class having tasted the blood of easy available money to pre-pone their access to that dream home would always be enticed by a sober smile and a few words of assurance by the seller, so long as our archaic municipal laws make it sure that owning a house remains a challenge (current housing shortage stands over a staggering 20 million).

In such a situation, by overlooking the fine print and going ahead in owning ‘that’ dream home, not only are we pushing ourselves to the brink of a lifetime debt, but also carrying the same legacy for our next generation. Thus, though most unfortunate, in the name of buying secured home, what we are actually buying is unprecedented insecurity for the future.


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