NHB has announced no prepayment penalty for housing loans. I came across the term, Prepayment Penalty while I was working with a Housing Finance company in 2003. I was intrigued and I asked around why there was such a charge.

Here’s the script I used if there was such a question from a customer:

1. Our charges are just 2% while this so-n-so private bank charges 4%. (note: This is not an answer. It’s devised to diverge the question and lead to bashing up the so-n-so bank)

2. There’s this asset liability projections that we have for our loans and these projections go awry if there are prepayments and so we have to charge. (note: this uses heavy jargons and people keep nodding their head without understanding any bit)

3. If the customer is well informed and persistent: Well, I will try to get a waiver from my Regional head and it will take some time. Often it takes more than 15 days.

The effect of this script was that there were hardly any waivers.

The takeaway here is that even though companies are India are not customer friendly, you can get waivers if you are informed and persistent. (Both!)

It’s also good to see regulators cracking the whip on companies to be more customer friendly. I am sure the RBI regulation for banks will come soon. NHB’s regulation applies for housing finance companies alone.

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A lot of experts advise investing in real estate as an important component of your asset allocation. But I am not really comfortable with this advice for the following reasons.

One, prices are already inflated with the amount of black money invested in this sector.

Two, the dealings in this industry is not really transparent and you are lucky to get a good deal without being an insider.

Three, the increase in value is notional, unless you get hold of another “bigger fool” to buy your real estate.

Four, you need a decent corpus to invest in real estate. Unlike the Rs 500 SIP that you need to invest in a Mutual Fund.

Deepak Parekh makes a few points in his interview in TOI today.
He says,

Basically, I feel the good old days of lowest interest rate are over. At the same time, I’m not concerned that they are going to double up or something. There will be a steady increase, but not a sharp increase. The trend is that interest rates would go up. Maybe, by another 50 basis points or so by December. Again, by another (50 basis points) in the next six months or so. It would have to balance growth and inflation.

Question: Coming to the realty sector, do you think affordable housing is going to be a reality in the country?

Deepak Parekh: Unfortunately for affordable housing, the bigger problems are in Delhi and Bombay. In these two cities land prices have shot through the roof. Unless the government is willing to give some land or develop some land for affordable housing, I don’t see how prices can come down significantly.

One of the complex things in India is to buy an apartment and not get cheated.

I’m sure a lot of you will disagree. I’m waiting to hear from you!

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While there’s a race for grabbing a large share of the home loan market through ‘teaser’ rates by banks, the government today warned that such schemes could land borrowers in financial distress.

“…Borrowers with low financial means may get attracted to take such loans on finding the initial low interest rates to be within their financial means, but may land themselves into a financial distress should interest rates start rising…,” Minister of state for Finance Namo Narain Meena told the Lok Sabha.

The caution was voiced by Meena at a time when the two leading private lenders -HDFC Ltd and ICICI Bank -relaunched teaser rates, offering loans at an interest rate of 8.25 per cent for the first year, followed by 9 per cent in the next and the market rate thereafter.

India’s largest lender SBI is already continuing with a similar scheme.

Commenting on the implication of such concessional interest rate loans, Minister of state for Finance Namo Narain Meena said the resulting delinquency would have adverse impact on the financial stability of the lending banks.

India’s banking regulator -the Reserve Bank of India (RBI) had also expressed concern on banks offering home loans with teaser rates, or schemes where monthly instalments rise after the initial years.

“Teaser rates are increasingly being offered which is a cause for concern,” said Usha Thorat, deputy governor, RBI had said. PTI ICICI Bank relaunches cheap home loans Country’s largest private sector lender ICICI Bank has re-launched its special home loan plan, also called teaser rates, to attract property buyers. “Mortgages continue to be a focus area for ICICI Bank. We offer competitive rates in the market and currently the rates are 8.25 per cent for first year, 9 per cent for the second year and the existing floating rate thereafter,” said a spokesperson of ICICI Bank.

The two other major financial institutions which are offering teaser rates are State Bank of India and HDFC.

Does the teaser rates worry you or it worries you that the Govt. is interfering ?

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