When Gopu, an IT consultant in his mid-30s, decided to buy an apartment in Bangalore in 2005, the entire family was excited. Everyone was looking forward to moving into a bigger and spacious one, compared with his earlier investment.
Gopu recalls: “We consulted a lawyer to ensure if everything was legitimate, and then sought loan from a private bank. They messed up and we had to make a lump payment to the builder. Since the private bank did not help us, we sought the loan from a nationalised bank. They did a thorough process of the application and finally came up with a number, stating: “this is your salary and this is what we can give you and this will be your monthly outgo (EMI).” After convincing ourselves that we will be able to manage our other expenses after the deduction of Rs 35,000 every month towards home loan dues, we went ahead. At the time of sanction, the rate was only 7.75 per cent. It has since shot up by 3.5 percentage points to 11.25 and my monthly outgo has also risen to Rs 45,000.”
And it was not just the increase in the monthly repayment of the loan that bothered Gopu. He lost his job in 2008, when the US economy went into recession. For over 16 months, he remained unemployed. But luckily his better-half Sunita was still employed and with a little austerity, they decided to manage. He, however, had to break some bank deposits, use his PF savings to tide over the expenses during the initial months.
“It was not easy. But looking back, I can say that the circumstances forced us to cut down drastically on our luxuries. We had to do away with a cook-cum-maid, not look at buying new stuff for the house, almost give up eating out and shopping just for fun and the weekend get-together among others. We had no choice,” joins Sunitha, who also fell a victim to lay-off, albeit for a shorter period (four months or so).
Though both have since been placed decently, they say that the inflationary pressures coupled with the sharp increase in fuel prices in recent months have forced them to think twice before making any commitment.
“Five years ago, we used to exchange all stuff such as the settee in the front-room, audio-player, TV, camera, light shade and so on once every two-three years and go for brand new and more expensive products. Now, we are content maintaining them, as we do not want to spend lavishly and compromise on more important issues such as our child's education and comfort,” says Sunitha.
Hikes in interest rates, higher EMIs, higher property prices... The flood of bad news for those buying houses/property on loans seems unending. With interest rates set to increase after another hike by the Reserve Bank of India (the 13{+t}{+h} over one-and-half years), it appears that borrowers will have to fork out more in the coming months.
Interest rates on home loans have gone up by 2.5 percentage points (250 basis points) over the past 18 months. Rating agency Crisil, recently estimated that the additional annual burden on borrowers on account of rising interest rates would be of the order of Rs 6,000 crore. For most borrowers, the rise in their EMIs has been of the order of 15 per cent.
Just how do customers and individual borrowers cope with changing circumstances? Business Line correspondents asked a number of people across the country on how they managed their monthly budget in the wake of higher EMIs.
The answers coming from various cities seem broadly similar – and simple. They are just what your dad or grandpa would have advised when you started earning. Just tighten your belt. Postpone the car purchase. Curtail visits to malls and restaurants. Sweat your furniture and fixtures more and don't replace them at the drop of a hat. Do things yourself and stop relying on hired help for every little thing. Put away something for the rainy day. Good times don't last forever – and neither do bad times! So bide your time and wait for the turn of the tide. All these are time-tested advice and they just come through once more from these vignettes. We'll run these stories over the next four days here.