Housing Loans – Asset or Liability?

Last Friday, I was chatting with a friend of mine, who works for a Software MNC in Chennai. Whenever we get a chance, it is common for us to share with each other our plans for future and seek other person’s advice and feedback.

A little background about him, before I continue: He is from a typical Indian middle class family and after a decade of career progression at various Software firms, he is now settled down in life – married, has a kid and a good paying job.

Our topic of the day was his recent decision to buy a house – certainly a right time to do it. The house was a 3-bedroom flat in the heart of Chennai and will cost him nearly Rs.50 Lakhs (which may be 3 to 5 years of his pay). He is going for a housing loan of nearly 90% of the property value. Considering normal household & living expenses the loan is likely to be repaid with in a 15 year tenure.

I started sharing with him what I think are very important points to understand about the impact of these loans, especially housing loans which have a long duration and huge value at stake. We normally go for buying a house thinking that a house is a great asset for the family. Even if an unfortunate event happens to the earning member, the house will provide a basic roof to the family. This is where many Indian Households miss to appreciate the fact that a house (or a car) when bought in loan is not ours (not an asset) until we have fully paid the loan. Till the point we are regularly paying the dues it certainly is an asset, but the minute we default (due to any reason, death or even sick bedridden due to an accident) it becomes a liability. An example will help here, Mr.X who has a wife (housewife), two school going children and he lives in a nucleus family. He buys a car at Rs.7 Lakhs for a three year tenure. In one year, he has repaid Rs.3 Lakhs and now owes only Rs.4 Lakhs. At this point, he meets a fatal accident and his wife is now left not with an asset of Rs.3 Lakhs (nowadays car value diminish greatly) but a liability of Rs.4 Lakhs. So not only the diseased family has lost the earning member, but also burdened with a huge/impossible outstanding to pay.

Coming back to my friends’ discussion, I advised him first to go for a life insurance for a value greater than the housing loan value. Since he has already invested in the house which will give him future returns, the life insurance should be a simple life cover with no returns. This way his premium for the insurance will be extremely low (few thousands per year) and it won’t be a double burden for him. There are some good single premium policies available now that will fit this need perfectly. This insurance should be his personal policy taken by him. This is because though his company has a good cover for his life, that will cease to exist if he loses his job (actually only at this time, the insurance becomes more significant).

On the loan front, he was considering finalizing the housing loan with a foreign bank who offered him 7% interest rate, his other offer was from a nationalized bank at 7.75%. I advised him to go with the nationalized bank. My argument was not on basis of any patriotic reasons, but because of my experiences over the years.

  1. The fine prints of a foreign bank (and also many of the private banks) are generally too difficult for a normal person to comprehend fully. With a nationalized bank, you will have the comfort factor that they represent “Government of India” and they will be sympathetic to your requests.
  2. Many times, these banks try all the tricks of the trade, when it comes to collections. Their use of so-called “collection agents” are legendary. Though most of the times the Foreign Banks are forced to do this, because of their huge defaults; that alone cannot be an excuse in a democratic country. Many times, these are used, purely circumventing the law of the land.
  3. Also foreign banks lacks customer relationship (or what I call human touch). Though they have huge IT investments on the best CRM products, there is no one to talk to, when you need help. The fantastic personal attention, caring phone calls, stop the minute you sign on the dotted lines. After this it becomes “so called” system driven. For everything you have to call hundred different numbers and repeat the same problem statement to two hundred people.
  4. You might say that I am missing about the Relationship managers that these banks proudly advertise about. These are normally available only for big corporates’ and my experience here again has not been good. In reality even when they are available they don’t help much because their knowledge on banking is extremely limited. They repeat verbatim what is their on the computer screens (which you would most of the time have already read from their secure/private website). For every query apart from the routine credit/debit, they have to check with their respective departments and this takes normally several days. Also the attrition/churn rates in these banks are extremely high, so within a year, you will be having at least a minimum of two to three relationship managers.

In contrast to this, every nationalized bank branch has a manager, who is well trained (qualified) on banking rules and business. For someone to come to a manager level in a nationalized bank, it would have taken atleast two decades of banking experience, during which they would have seen different people and different scenerios. In other words, they are not fresh out of college, learning now on the job. In almost all the branches (especially more so with branches in residential areas) the manager or deputy manager is easily accessible and tries their level best to accommodate your requests. Each manager serves in a bank at least for a period of two years, before getting transferred; and the clerical staffs (who you deal mostly) stay in each branch for even longer duration.

Having said the above, Foreign/Private banks are good too, when all you want is a Saving Accounts with good ATM reach and state of the art online presence. Above all they are good if most of the time your wants are simple products/service which can be self-serviced. In other words, if you have needs that hardly require a human being at the other side, these banks definitely excel nationalized banks.

Finally, coming back to my friends’ story; I have convinced him enough that he is currently reconsidering all his options thoroughly.

Self Service ATM & Web