November 27, 2011

Clear your home loan before you turn 60

R.P. Deshpande

.. This article is the second in the four-part series that is attempting to focus on the repercussions intrinsic to extended tenures' offered newly in the home loan segment. Long-drawnout repayment periods are being packaged in brand new ways, and borrowers, who would also be puzzled with trendy marketing concepts, need to recognise the fundamental returns and shortcomings inherent in such loans. This week we look into specifics, where we analyse the nature of home loans that extend beyond one's retirement. Are loans that grow beyond one's earning age worth their value? What exactly do such protracted repayments mean to borrowers when they have to settle accounts even as senior citizens? Dissect some vital factors before you settle down on tackling such EMIs !

Extending home loan tenure to an applicant's age of 70 years will not only prove detrimental to a majority of the borrowers, but from the banks' perspective, defaulters may also increase, warns R.P. Deshpande ...

The age limit for repaying loans, which used to be up to age of retirement for salaried class and 60/65 years for selfemployed/business class applicants by all lenders, has been raised to 70 years for all category of applicants, as per the information available on the website of State Bank of India. The forefathers of home finance system have scientifically made the policy of extending loan tenure up to age of retirement, considering all relevant factors. Once the employed borrower retires, his regular income would drastically reduce and even those lucky ones who get pension (only 11 per cent of formal employees are eligible for pension in our country), the amount is meagre, may be 30-35 per cent of last emoluments (salary + perks) drawn. After retirement, people tend to spend more towards healthcare and normally have higher liabilities such as children's marriage/higher studies etc. In such a financial condition, continuing loan repayment would be a heavy burden. Even self-employed or business class borrowers may not be able to be active in their business or profession beyond 60-65 years of age. Their regular income could also get halved, leaving no room for any loan repayment schedules. The shift One more paradigm shift noticed in the younger generation is that most of them would like to take retirement much earlier to 60 years of age. Such people, who have opted for loan repayment beyond retirement, would find it difficult to repay the home loan instalments post-retirement. Hence extending loan tenure up to 70 years of applicant's age could prove detrimental to majority of the borrowers. The result: defaults would rise as borrowers above 60 years of age may not be able to keep up their repayment commitments due to lesser income generation. The lenders may have to enforce the security of mortgage, under SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) Act 2002 and other legal procedures, leaving senior citizens homeless. An example 2

Let us take the example of Prabhakar Rao, a government employee with Rs. 55,000 net income, who could realise his dream of owning a home at the age of 45 years, after exhausting all his life-time savings and taking a home loan of Rs. 30 lakh at 10 per cent interest, with an EMI of Rs. 27,262. The bank coaxed him into opting for a 25-year tenure in order to be eligible for required loan of Rs. 30 lakh. Mr. Rao thus got a loan with tenure of 25 years (up to his age of 70 years). The lender considered factors such as Mr. Rao's estimated pension and the fact that his only son (who was 15 years old when loan was taken) may support his father for repayment of loan after Mr. Rao's retirement.

Let us presume a usual situation when Mr. Rao retires. By then, he would have spent all his savings for son's education and marriage. Son could be settled in the U.S. and is not even on talking terms with his parents. The outstanding loan is Rs. 20.62 lakh and monthly out going (EMI) is Rs. 27,262. Since the pension is not sufficient to meet even family expenses, Mr. Rao becomes a defaulter. The bank may contemplate enforcing security of mortgage by evicting Mr. Rao and auctioning his property. Thus, after realising his dream of owning a shelter when he was 45 years old, Mr. Rao could be a shelterless citizen at the age of 60 years! Where can he go now with his ailing wife? Who is responsible for this plight of Mr. Rao? Surely, it is the diluted norm of the bank which offered him loan repayment up to the age of 70 years. Had the bank used the wisdom of sound ethics of lending and offered him repayment up to retirement age of 60 years, Mr. Rao would have closed the loan before his retirement. When he was eligible for a loan of Rs. 25.5 lakh for a 15-year term (50 per cent of income considered for EMI), he would have been advised to take a 15-year loan with an EMI of Rs. 27,403 and seek a property costing Rs. 5 lakh less or reduce the size of proposed construction (like reducing one bedroom). The move to extend loan up to 70 years of age of borrowers would create thousands of Raos, which not only would strain the financial health of lenders, but create social problems for elderly people. Wooing the gullible Another disturbing factor is that the SBI is trying to woo gullible home loan seekers with higher amount of loan, which is against the norms of lending. 3

Till now, banks and HFCs have been suggesting that home loan seekers be content with loan eligibility and compromise on the size of the house, or change locality or come down on specifications of construction such as reducing luxury items etc. (We will analyse how the call for availing oneself of higher quantum of loan will affect both the common man and lenders in the next issue) (The author is Director, Institute of Home Finance, and can be contacted at deshpanderp2007 @gmail.com) http://www.thehindu.com/todays-paper/tp-features/tp propertyplus/article2664100.ece