Do You Know Your Housing Loan Interest Rate?

by Mr. Harsh Roongta, Apnapaisa

A new client mentioned the loss on a mutual fund (MF) investment of Rs. 15 lakh. She had made systematic investments in equity mutual funds, acting on the advice of her previous financial advisor.

While going through her profile, we noticed she also had a housing loan of Rs. 75 lakh which he had taken nearly 3 years ago.

Apart from knowing her monthly EMI (equated monthly instalment) which was Rs. 74,000, she had no idea about her loan amount due, as well as the interest she was paying on it.

Harsh Roongta,
Apnapaisa

However, she vaguely remembered the lender had increased interest rates.

A little digging showed the interest rate she was now paying was 12% and the reason she was not aware of this was the lender had kept her EMI the same, while increasing the tenure of the loan.

This was an investor who had consulted a financial advisor and checked her mutual fund return statements. She was dissatisfied with the performance of her mutual fund portfolio (the reason why she approached us).

It was, therefore, a shock that such an investor was totally oblivious to the cost she was paying for her housing loan. Acting on our advice, she spoke to her lender Bank and secured substantial reduction in the rate without any cost or / major effort.

But it set me thinking. Investment is an activity that makes you a more active participant in the process. This might be missing even though you could be paying an enormous percentage of your monthly income as EMI on your housing loan.

As long as the amount does not change, you are oblivious to the cost, despite being vaguely aware you are paying more than what you should be.

Do you know the interest rate you are paying on your housing loan?

Believe me, very few people (mostly those who have just taken the loan) know the actual interest rate they pay on housing loans. When the same question was asked to a group of mutual fund investors who invested through systematic investment plans (SIPs), a significantly high number were aware of the returns they were getting.

So, there is a strange dichotomy between SIP investments & loans, though in both cases, the instalment is debited from bank accounts automatically every month. Perhaps, what leads to this is the voluntary nature of SIP payments (which can be stopped at any time, without any penalty), as well as the fact that the interest rate is not visible in the EMI. There is no immediate pain when the interest rate on your home loan is raised, as the EMI remains the same.

You tend to ignore the communication (letter / e - mail / SMS) you receive informing you of the increase in interest rate (now mandatory, according to regulations).

Banks started the practice of increasing (I keep saying 'increasing' rather than 'changing' simply because very few consumers have actually seen the benefit of a reduction in tenure when interest rates drop) tenure, rather than EMI for practical considerations, as repayments are made by post-dated cheques & securing fresh post -dated cheques as replacements for the old cheques is a Herculean and expensive task.

When the repayment mode shifted to ECS (electronic clearing system), the practice continued.

In the past, whenever banks have been forced to increase EMIs due to rapid increases in interest rates (despite the costs involved), they have seen increased consumer activity to shift loans to cheaper lenders. And, it is better when consumers shift their loans to competition. Both the regulators (the Reserve Bank of India - RBI and the National Housing Bank -NHB) have officially acknowledged the pernicious market practice of Indian lenders to charge higher rates to existing housing loan consumers, while providing lower rates to new ones.

The regulators RBI and NHB were forced by public opinion to ban pre-payment charges to provide some respite, at least to more aware and active consumers. Now, they can do more by mandating a change in the default option when interest rates of the lenders change - the default option should be to change the EMI amount due to the change in interest rates. This is good for lenders, too, as tenures would not stretch (thereby, increasing credit risk for the lender) and as consumers sign the ECS mandate for larger limits, they are likely to be sensitised to the fact that EMIs could increase as interest rates rise.

Of course, consumers can talk to lenders and revert to keeping the EMIs the same, with a change in the tenure. And, if the rates are reduced, they would actually see more cash in their hands because of reduced EMIs.

Do you agree changing the default methodology is a good idea? I await your comments.

About the author..

The writer is CEO at Apnapaisa
Harsh Roongta
CEO Apnapaisa (earlier known as Apnaloan.com)
Mumbai Area, IndiaInternet
Current
Apnapaisa (Earlier known as Apnaloan.com Services)
Previous
ICICI Bank, Anik Financial Services Pvt. Ltd., A F Ferguson & Co.
Education  - Institute of Chartered Accountants of India

Have been involved in starting busiensses from scratch for ICICI as well as an entreprenuer. I simply love the constructive chaos of a start up and am good at putting teams togather and managing talented individuals to work towards a common goal.

Specialties: retail lending, consumer interaction, consumer delight