Risk strategy, not Investment strategy!
A friend called me with a surprising question.
Let us call him M.D.
He bought a house in Navi Mumbai for about Rs. 80 Lakhs, – of this about Rs. 55 lakhs was funded by a loan from the State Bank of India. Over the last 4 years he had paid a lot of interest, but the principal outstanding was still Rs. 52 lakhs.
He was also doing some SIPs which had seen an amount of Rs. 33 lakhs, but now in this market was worth Rs. 30 lakhs – not too bad, but the IRR was not too great. He does not have any debt investments except his LIC endowment policies – and all the policies are together worth Rs. 30 lakhs.
So far fine. He just lost his job with effect from December, 2011 or Jan 2012…..
He will have to find a new job, NOW and immediately.
What is at stake?
Household expenses (including children’s school fees) …….Rs. 100,000
EMI Rs. 52,000
His needs are as follows:
Rs. 1.5L x 12 = Rs. 18L – assuming he gets a job in 6 months, he will need Rs. 9 L.
He is about 53 years of age – he needs to have his retirement corpus in place. He knows that jobs paying Rs. 25 lakhs and above are almost non existent especially in Sales and Marketing unless you are willing to take aggressive targets. In the bfsi space perhaps it is only a bank that will take him. How does a 53 year old join an aggressive and young bank? Not so easy….
He can always sell his house (he thinks it has appreciated, my take is the appreciation is LESS than the interest paid on the loan..but yes that is a choice. Options are few and far between in the jobs. Most people expect a 53 year old to be holding a technical qualification or an address book of potential clients…he has neither…
What does one do? Looking for answers…
SAM
Subra
Scary Situation! Sell the house is what I would do. But the catch being – it would take atleast 3 to 4 months to sell the house.
I am thinking – he has some emergency fund in FD’s or SB A/c?
Jsan
Hi Subra Sir, M.D. is in situation where there will be lot of people in NEAR future. About the solution (I am not expert planner but just a recommendation), lets see all options and go one by one:
Option 1, House: His major outgo is EMI of 50K+ but I think even if he sells the house, he will have to rent a new house which will put more burden in short term (Deposit, Brokerage, etc). Averaging this on for next 12 months it will be 25K+ if he wants to stay in Good area near facilities like School, Market, etc. No a great options to sell the House.
Option 2, SIP: I am assuming SIP outgo is considered in 100K expense. He can start a SWP in some MFs for next 12 months, taking some portion out in bad performing MFs. This will allow him to stop SWP anytime as soon as he gets a Job.
Option 3, LIC: He can withdraw some policies and utilize the money for daily expenses. He can also buy some Term plan for the additional risk cover.
Retirement planning: He can continue his SIP and buy Term plan for risk cover. His first objective should be to reduce the Principle amount for his Home by prepaying, if he gets any surplus. As M.D. is 53 years old, he might have already Good amount in compulsory contribution towards PF. These amount can form a major part for his retirement corpus.
Ajay
Though I am much younger to person in question, I have following to say
The first step in my opinion would be to cut down the discretionary expenses. The expenses of 100K excluding housing is on higher side even for upper middle class style of living.
Though I would not think its a good idea, but asking for help from close relatives/ friends can be considered.
suhas
Just to share my experience
I am working in Private sector for 15years
First job change was after 7 years .There I got some 1.5 lakhs as PF.
With current employer I was transferred intercompany some 4 times.
Every time I withdrew my PF & Was happy to get lumpsum for partying.
Today after 7 years of employment , I have only 2 years of PF .
I lost money because couldn’t compound . My current pf is mere 20K
This is scary .After 15 years of work I have 20K PF
I was finnacially illetrate , every body advised to witdraw as it takes long time & hassles to transfer …big mistake
Guys my suggestion …please do not withdraw your ePF …just carry it forward .. let it grow you will earn more .
Jayant
1) Surrender all endowment policies. Use surrender value and fund his emergency corpus. Remaining balance to pre-pay as much loan as possible.
2) Take a PURE term plan to cover his liabilities and in line with best practices Income replacement method or expenditure coverage method
3) Lower the life style. Cut down on discretionary expenses. This is too simple to be true and easier said than done.
4) Review MF investments and weed dud investments.
5) Like Subra sir always states, 1 bank acct, 1 Credit card (to be kept at home when shopping), max 2-3 MFs. Shut down all other noise.
raghav
Hi
Even me, too much younger to M.D and yourself, Subra.. What i feel is this..
Never think of selling that home.. He would have bought with lot of dreams and hope.. even his family members would have so much affection towards it. happens always.. instead he can sit back and think of all possible options.
here are wat i feel..
1. think of renting a part of the home.. not sure if this is possible.. if there is a separate portion kind of a facility, then that can be rented out. this would give him some regular income.
2. many LIC policies, provide some kind of loan facility against the policy amount paid. he can think of getting that amount as a contingency fund as of now.
3. budgeting would help for sure. 100k towards monthly expenses is really high. i feel it can be cut down if M.D can list out all his expenses and identify what can be cut.
4. think of negotiating with the bank to increase the loan term for time being. even extending the loan term by another 5 years would bring down his EMI..
5. if step 4 doesnt workout, he can even think of transferring his loan to some other bank, interest rate can be high, but he can ask for a higher loan term.. this should bring down his EMI again..
6. if not a 25l/annum CTC, he can try for anything from 20l/annum as a temporary job..
instead of worrying, he can sit back and think of all possible ways to bring in fund flow.. let selling his home be the last possible option..
dr m kishan
Hi subra sir
One thing I dont understand is why should one continue the endowment policies. It seems illogical to get 4-5% returns and give interest on home loan @ around 9-10 % atleast. I think he should return his 50% loan by surrendering the endowment policies (and ask the bank to reduce the emi rather than the tenure of the loan). Take term plan. 2 crores sum assured LIC term plan for 53 year old upto 70 years age is 2.53 lacs.
Renting the present house and shifting to another locality with rent giveaway less than the rent he gets from his own house should solve some problem.
Bringing down some expenditures will solve some more problem.
For the rest of the expenditure he may withdraw as SWP from MFs
Subra sir
we all have given some answers. What is your solution for the scenario? Please enlighten us
dr kishan
Raja
Just a thought…Some data points don’t match…
52k EMI on a loan of 55 lakh ??
If i try to calculate the EMI on SBI’s EMI calculator site, the EMI for 55 lakh comes to 56k at 12% for 360 months (30 years)
So, did he take the loan for a duration of 30 years at age of 49 (current age 53 – 4 years he has been paying EMI) ?? Li’l dicey… I don’t think even SBI will grant that…
2nd thing is… like Ajay said expense of 1 lac per month excluding housing even on a salary of 25 lac is way too high. This means he was consuming almost everything that he was earning (12 lac expense + 6 lac EMI + 4-5 lac of tax) ?? Not acceptable… My idea would be limit expenses to 33% of post tax income…
Sorry am too meek hearted to offer any solution in this case!
Raja
@Suhas,
And one more thing you missed on all your PF transfer’s is … the 640/- (or something close) amount of money which used to go to pension fund (or something similar) from your employers PF contribution every month.
Every single time you withdrew the PF money and started a new PF a/c , govt(or some ghost) got to keep that 640/-.
So, in your case it was close to over a lac in principal amount that you never got to see again!! Congrats!
Am on similar boat but for different reasons. I recently took a posting abroad after 9 years of service in India and currently trying to withdraw my PF as i know it won’t earn interest after being inactive for a year. And i too stand to lose (track of) close to 1 lac of my own money. I heard one can only get some annuity from that amount.. but i wonder how many ppl track such annuity payments..
Regards
Raja
Raja
To add to the point of EMI not matching with the loan amount and age as mentioned before.. Assuming he had taken a floating rate loan when interest rate was @ 10% for 20 years (53k EMI)…and he is refusing to come to terms with the subsequent increase in the interest rate (Which SBI happily doesn’t remind him because they can increase the term easily instead of taking the pain to remind every customer to increase the EMI cheque)..
It means his actual current EMI is close to 63k and since he is not paying it .. his term for the loan is likely to shoot up above 20+ years or his age of 69+ …
Vishal Khandelwal
Two things worth noting here:
1. His lifestyle seems extravagant with a monthly expense of Rs 1 lac. So he must cut it drastically asap.
2. At 53 years of age, how come his children are still in school? They must now be earning on their own and can support their father.
The long term solution is to sell the house, pay the bank loan, keep whatever is left, move to a small town, live a lesser lavish life, but live peacefully.
Ajay
Vishal
Moving To smaller city could have been a good idea, had he has been looking for retirement.
But he still is seeking employment, so getting job in smaller city would be difficult.
As somebody already mentioned, selling house should be the last resort, in current market scenario, getting a good price wont be easy.
He already have sufficient savings of around Rs 60 L, its not a dire situation.
Simply cutting down expenses till he finds a new job even if it pays less should do the trick.
It should buy him sufficient time.
Milind N
Subra…This is where Many readers thanks you in Heart.We have not gone for Leveraging which is beyond our means for becomming so called owner ….of a flat which actually belong to Bank and should there be any situation like this ,which is not rare in any time and more so in situation in which world is going through at the moment…Many thx for educating to readers of this Blog since couple of years ,that we avoided this mistake.I am sure other readers will agree and are greatful for that.
vivek
Looks like the question is just a fiction.. he just wants to test the readers
bharat shah
i endorse what Milind N. expressed above.many times whiling hearing rising 1.5 times the cost of the flat within 1-1.5 year time, which could not be bought on ground of some basic thinking ,say, one should not buy it till affordable, we feel that we lost opportunities. but this story reminds the wholesome idea behind the basic thinking.
however i am puzzled when subra is saying the appreciation in value of the flat worth 80 lacs four years ago in Navi Mumbai is less than the interest paid on the loan . as i understand from my brother who booked for 3500/- per sq.ft. before 2 yrs. is now quoting between 5100/- to 5900/.
subra
castles built in the air have a problem only when you try to move in! Builders are offering prices far, far lesser than a re-seller can. Free car parking, free split a/c…times are bad Bharat 🙂 Not enuf buyers sadly. I know one builder who offered a very very deep discount for somebody willing to buy 5 flats – in another suburb (not NM, but as glamorous)..
bharat shah
@vivek
no, this could be real.particularly loosing high paying job in this age of 2G and other scams. and particularly for those in age between 45-55 yrs. and who got such high pay in their last job, partly due to transfer to metro city .
SAM
Subra,
What is your solution to the predicament of MD?
Anand
He only needs 9 lakhs, assuming he will find a job in 6 months. So, why take all these drastic steps?
He has Rs. 30 lakhs worth of endowment policies. He only needs to rustle up some policies whose surrender value is around Rs. 1.5 lakhs (One month expenses). I’m assuming, he has multiple policies totalling to Rs. 30 lakhs.
Start a systematic withdrawal from some of his MF’s from the next month onwards to fund his expenses (or surrender some more endowment policies)
Most importantly, start moving some of his equity based MF investments into debt MFs.
Better still, surrender all his endowment policies, take out a 7 year term plan for R. 1.5 cr (appr. Rs. 18Lakhs * 7 years till retirement), keep 6 months expenses in a liquid fund (Rs. 9 lakhs) and use the balance money to prepay the home loan and negotiate better interest rates and lower EMIs.