Impact Of Increase In Home Loan Interest Rates On Home Loan EMI In India

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Analysis

Floating rates of interest are tied to the benchmark rates of banks. Thus, the applicable loan rate for a particular customer changes with respect to the movement in the overall and benchmark rates. Banks use different ways to adjust these changes.

Usually, in a floating rate loan the adjustment is not made in the amount of the equated monthly instalment (EMI) but the repayment time of the loan.

Take Arjun's case
Arjun started off with a loan of Rs 10 lakh with

Repayment period – 15 years
Interest rate – 7.5 per cent
EMI – Rs 9,270

After 6 months…
Arjun's outstanding capital was Rs 9,90,000
Repayment period – 15 years and 7 months
Interest rate – 8 per cent
EMI – Rs 9,270

We see that when the rate of interest jumped to 8 per cent, Arjun's EMI did not change but the repayment period went up to 187 months, i.e., 15 years and 7 months. And this happened even after his paying off of 6 months' loan.

Does it mean, every time the rate changes, Arjun's
repayment period will increase? And how long will this go on?

To deal with this problem, different banks have adopted different conditions that usually even the borrower is not aware of.

E.g., a bank might decide that for a young customer the repayment period should not be more than 25 years, while for a slightly older person it might be 20 years.

As per the internal limit set by his bank, Arjun should repay the loan by the time of his retirement, that is, at 58 years. Today, Arjun is 37 years old which means he has an additional 21 years from now on to pay off the loan.

Let's see the latest situation

Arjun's loan rate has raised to 10.5 per cent, from earlier 9.75 per cent.

His outstanding capital – Rs 9,50,000

Considering the EMI amount remains the same, i.e., Rs 9,270, the period for loan repayments rises to 260 months, which is 21 years and 8 months.

This exceeds the permissible limit of 21 years.

What is the solution?

Arjun's bank does not want to extend his repayment period further, so it is asking Arjun to repay a lump sum amount on his loan in order to bring down his outstanding capital.

In case Arjun pays back Rs 10,000 then the outstanding period will drop just below the 21-year mark. But if he goes for a larger amount like Rs 50,000, it will bring down the outstanding a bit so that in case of a rate increase in the future, the figure will not require immediate action.

What should Arjun do?

Arjun has no choice but to make the necessary lump sum payment. This will bring down the number of outstanding EMIs, which are pushing the repayment period beyond 15 years.

He can do little in case there is a one-way rise in rates but in future he can keep a track of the amount of capital and number of EMIs that he has to pay as it will tell him in advance whether he needs to make a similar payment.