Home loan borrowers face higher instalment payout


New Delhi : Already hit by spiralling prices of household items, those who have already taken home loans face the prospect of having to cough up higher equated monthly instalments (EMIs).

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The central bank Tuesday increased its repo rate (the rate at which it lends to commercial banks) by 0.5 percent, and the cash credit ratio (the minimum cash a bank has to set aside against deposits) by 0.25 percent.

This is bound to goad banks to raise the interest rates, including those imposed on floating home loans. Already, Punjab National Bank, Axis Bank and Yes Bank have increased their lending rates, and other banks are expected to follow suit.

Said Rajesh Sharma, a senior executive with HDFC Bank: “What this means is that in the case of a 20-year loan, a 25-bps (basis points) hike will mean the EMI going up by Rs.17 for every Rs.1 lakh (Rs.100,000) loan amount, in case of a 50-bps hike, it will be Rs.34 and in case of 75 bps, the EMI will rise by Rs.51.

“Similarly, if it is a 15-year loan, a 25-bps hike will push up EMI by Rs.16 a month, a 50-bps hike by Rs.33, and a 75-bps hike by Rs.50.”

While those planning to buy a house will merely have to postpone their purchase, those who are already repaying an existing home loan will be the hardest hit.

“My monthly budget is in a mess. I am already paying Rs.1,500 more EMI from last month and another hike will make situation very difficult for me,” said Suman Sinha, a software engineer who took a loan three years ago on a floating interest rate.

However, following the latest hike, it’s not just the interest rates on floating rate home loans that is going to rise, said HDFC’s Sharma. According to him, many banks are also looking to revise fixed loan rates.

Sharma said most banks insert a reset clause in the fixed-rate home loan agreement; this gives them the right to revise the home loan rate even if the borrower had opted for a fixed rate.

“For instance, in the case of State Bank of India, the interest rate reset happens at the end of every two years from the date the loan has been disbursed. For Bank of India, the reset is at the end of every five years.”

Even when borrowers have the option of maintaining the same EMI and increasing the tenure of the loan, a 0.5 percent increase in home loan rates – which appears most likely – will increase the tenure of a Rs.3-million 20-year loan by nearly three years.

Those who are on the verge of retirement face further blow as banks ask borrowers to increase their EMIs once the tenure crosses their retirement age.

“After interest rates were hiked, I wanted to increase the payment tenure rather than paying higher EMI. But my bank said the tenure cannot be increased endlessly and asked me to increase the EMI as the tenure is crossing my retirement age,” said Reshmi Gupta, a lecturer with Indraprastha University who took a loan two years ago from SBI.

The banks, on their part, said increasing EMI amounts was the best option for borrowers.

Said ICICI Bank executive director V. Vaidyanathan: “We ask customers to change EMIs rather than opting for increasing the tenure as they may end up paying a whole lot more. So the best possible option in this condition for an individual is to opt for an increased EMI and maintain the same tenure.”