With petrol prices and interest rates high, it would help to limit extravagant purchases this festive season and invest, till the tide turns.
With high inflation and slipping equity markets already hurting the wallet, the decision of oil marketing companies on Thursdayto hike petrol prices by Rs 3.14 a litre was added to the woes of the consumer.
Coupled with that, the Reserve Bank of India hiked key policy rates by 25 basis points on Friday, leading to a perfect recipe for a gloomy festive season.
Already two banks, State Bank of India and Bank of Maharashtra ,are talking about hiking interest rates. Some banks are also saying that there could be lesser or no discount on loan rates this season.
Interest rates on home, auto loans are hovering around 11-12 per cent. Rates have risen 325 basis points since April 2010. The latest hike will only push your equated monthly instalments (EMIs) further up. Many, therefore, may relook their plans and avoid big purchases this festive season.
Like Bangalore-based Vincent Cherian who was falling short of Rs 50,000 for a bike – a Honda CBR – worth Rs 1.83 lakh has postponed his decision by two to three months. Apart from high rates on loan, increased petrol cost has forced him to reverse his decision. Petrol price havr risen from Rs 50 a litre to over Rs 70 in the last 18 months.
Similarly, rising home loan rates put a spanner on dentist Pushkaraj Deshpande's plans of buying a house. He had saved Rs 15 lakh for a Rs 55 -60 lakh property, and planned to take a loan for the remaining amount.
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Financial advisors seem to be on the same page and favour postponement of both house and car purchases. However, the rate hike alone should not make a difference. Reason: Home loans are long gestation loans and the rates keep moving up and down during the tenure (typically between 15 and 20 years). And you don't decide to buy a house over night.
“Rate hikes impact the buying sentiment mainly, high property prices are a bigger deterrent,” says Anand Narayanan, national director - residential transactions, Knight Frank. And he feels a correction is in the offing. “We feel that some amount of rationality has already crept into the new project pricing (launched three-four months back). Any launches going further may offer better prices,” explains Narayanan.
This sits well with financial advisors, who feel that home purchases can be postponed by three-six months. After which both the interest rates and property prices may cool off. In case the property being purchased is a second home, primarily for investment purpose, it can wait.
Sumeet Vaid, CEO, Ffreedom Financial Planners offers another perspective. If you do not have substantial savings to make the house purchase and are going to heavily depend on financing, the purchase can wait. He feels it is better to stay on rent as the difference between the rental and EMI may be in excess of 50 per cent.
A two bedroom-hall-kitchen flat in Dadar-Matunga area of Mumbai would cost approximately Rs 2 crore (existing construction). Let’s assume one opts for the maximum finance available - 80 per cent of the property cost or loan-to value. The applicable loan amount would be Rs 1.6 crore and the EMI would be almost Rs 1.76 lakh over a 20-year period. Alternatively, you could rent a similar property in the same area for Rs 50,000 - 60,000. Difference = More than Rs 1 lakh.
As for car purchases, unless absolutely necessary, it can be ruled out completely at the moment. “This is a discretionary expense and can be avoided. Moreover a car loan is a ‘bad loan’,” says Saurabh Agarwal, Director at Kennis Group. Car loans do not qualify for any tax benefits.
As for the petrol price hike, most feel that going ahead the prices will continue to rise. Therefore, if you must buy a car, consider a diesel or CNG model instead.
Should you take this ‘expert’ advice and push your purchase plans further, the question arises – what about the amount accumulated for the down payment of the house or car?
Park your funds in debt instruments for short-term goals (one to two years away) and equities for long-term goals (over 3 to 5 years away). Your choice of investment instrument would depend on how long you can postpone your buying plans.
If you can't wait for more than a year, take Uday Narayan Dubey, institutional business head of R K Global’s advice. “Look at long-term (three-year) fixed maturity plans (FMPs, one-year returns = 8.21 per cent), which can be redeemed within six months.
The yields will also be high on the back of high interest rates. The exit charges are a minimal, so even if you exit before the tenure is over, you will not take a big hit,” he suggests.
It is advisable to lock in your money in instruments which help you take advantage of high interest rates. Fixed deposits should be considered only if you are sure of the holding period because exiting it will come at a price.