End of the financial year in sight. Everyone’s also preparing for their corporate budgets to get set, and of course personal appraisals, ratings and more importantly salary hikes. Yikes!!! They are back, aren’t they? Well, “I am keeping my fingers crossed” you might mutter, but it is all the leading dailies and popular business magazines are saying so. For the record, they all seem to predict between 15%-20% salary hikes over the 2009-2010 salary levels.
So is there a grand merit to be happy? Well not really if you belong to the great Indian middle class. The tax dole that was handed out by the FM in the February 2010 budget will taken away by a host of price hikes that are coming from various sources. Remember “One hand giveth, other taketh away” seems the ‘mantra’ of the UPA government.
Home (A)loan
But the greatest of the shock will come for those who are the most sacred group; termed in the US as “homeowners”. This category is also upcoming in India in a big way over the past 15 or so years, thanks to a host of factors; growing nuclear families; migration from towns to cities (urbanization) and higher workforce mobility (people moving from one city to another due to change in job).
Nothing wrong in creating an asset, in fact, there is a totally a different kind of pleasure owing a dwelling unit for yourself. The problem, however, lies in two aspects; one taking a loan to fund the purchase1 (how else do you own a home, you might ask) and more importantly inability to determine the capacity to pay the loan correctly. The latter is extremely critical because more than 50% of the people cannot exercise judgement while taking the home loan due to the nature of the tenor (a 10 year plus) and any ordinary human’s inability to predict what lies ahead, leave alone for the next 10, 15 or 20 years.
So getting carried away by current disposable income (twin income households are the most vulnerable here), taking fancy assumptions (such as last 5 year salary increments should continue in the next 15 years) and lastly not accounting for even expected changes such as growing family and its needs (kids and their expenses).
All this and you have a disaster in the making.
You could be teased by your bank soon
This could be a reality soon enough (maybe this year or early next year) if you have relied on reckless borrowing to fund that large house and worse still bought it by taking the special interest rates. We are talking about the teaser loan rates offered by a clutch of banks starting with SBI. These loans have clauses such as 8% for 1st year, 9% for second year and third year and floating thereafter. Mind you that people who have already completed 1 year on this scheme (this scheme was launched early last year) will now reset their interest rate by 1% and have already 12 months before the next reset. The worrying aspect is that over the next twelve months, giving the way the rate environment is hardening, all these teaser loans could very well get reset at more than 250-300bps taking the rate charged to 12%p.a. These very banks (SBI and their likes) which looked like angels who provided you with that dream house could turn in demons who are hell bent in making that homeownership like a noose around your neck.
Homeowner could be teased so badly that they might feel like they are molested. Obviously, not all of them could feel the pain of this and only those who have not been prudent in planning for their EMI could face the stick. For the unlucky lot we only have one advise, you guys still have time on your hands, check with your financial planner on what is the worst case scenario in terms of higher EMI payout if the rates rise and how much of the disposable income squeeze do you get. If you are shocked by the result there is hope in terms of restructuring and whole host of options that are there before the tornado strikes.
All the best till then and yes don’t forget to check your finances today for income and expenses of the EMI’s you pay today, because you could be teased tomorrow.
Until next time!!
1 Just 25 years ago when we were yet to reach the sophistication levels with financial products that are offered today, homeownership was mostly self funded with retirement money; families were less mobile and people therefore compromised on the location of the home to suit the budget.
