- Client Background
One of our existing client nearing retirement, faced significant financial challenges when he decided to purchase a 2 BHK apartment in Andheri during the real estate price correction caused by the COVID-19 pandemic. Despite having financial resources slightly below the required retirement corpus, the client saw an opportunity to invest in the discounted property due to the pandemic situation. With his wife still actively working and his NRI son providing additional financial support, the client secured a home loan of Rs. 1.10 crores for a 20-year repayment tenure. However, he had to liquidate more than 50% of his financial investments to fund the remaining portion of the apartment purchase. After purchasing the property, they decided to put it on rent, which covered approximately 40% of the EMI they were paying, resulting in a rental yield of around 3% after deducting society maintenance costs and taxes.
- Challenges Faced by the Client
The client encountered further difficulties when interest rates began to rise, extending the home loan tenure from 20 years to 32 years. As a result, the increase in interest rates was summing up to a 40% rise in the total cost of the apartment due to added interest expenses. Although the bank might have sent email communications about the loan, they did not address the changes because the EMI amount kept unchanged by the bank.
- Solution Provided
Upon understanding the client’s predicament, we promptly intervened to address the challenges and devise an effective solution:
- Interest Rate Awareness: We educated the client about the changes in interest rates and the subsequent increase in the home loan tenure, emphasizing the significant impact on their overall interest costs.
- Overdraft-Based Home Loan Strategy: We formulated a strategic plan to mitigate the impact of rising interest rates by shifting the existing home loan to an overdraft-based home loan. This innovative approach allowed us to transfer the client’s emergency savings (which was not earning more than home loan interest rate) into the overdraft account, effectively offsetting the impact of the interest rate With overdraft account, client was allowed to withdraw the balance maintained on account of any financial or health related emergencies. To ensure clarity, we designed an amortization statement to provide a detailed understanding of the loan workings and its long-term implications.
- Outcomes
By implementing the overdraft-based home loan strategy and transferring emergency savings, we successfully reduced the adverse effects of rising interest rates on the client’s financial situation keeping the flexibility to withdraw in the emergency situations. Our proactive approach not only alleviated immediate concerns but also provided the client with a clearer understanding of their financial obligations and opportunities for optimizing their resources in retirement.
- Conclusion
This case exemplifies our commitment to providing tailored financial solutions and proactive guidance to address the evolving needs and challenges of our clients, ensuring their financial well-being and peace of mind in retirement.
* We take our clients’ confidentiality seriously. While we’ve not disclosed their names, the results are real.
