Building a home is a dream come true for most people. Most of them plan and save up for years, as it calls for a large amount. Still, a home loan is what comes as a rescue to many buyers. It is with the aid of a home loan, that a person with a regular, stipulated income can afford to buy an apartment.
However, home loans have become a problem for many because of the rising cost of living and higher interest rates that have pushed up EMIs.
The recurring rise in home loan rates has been hitting the borrower hard since some time now. The common man is forced to put many of his other financial plans on the back burner because of this.
Here is a classic example of how Sanjay Paranjape (name changed to protect identity) is still under a heavy debt burden despite regular repayment of his housing loan since 2002.
Paranjape took a housing loan of . 3 lakh in November 2002. His EMI was fixed at . 2,996. The loan was granted for 240 months initially. One of the leading private sector banks which has granted the loan started increasing the rate of interest periodically and consequently the EMI, as well.
What is intriguing is the allocation portion of EMI towards the principal amount. A very small portion of EMI, say just 10-15% of the EMI, gets allocated towards the principal portion of loan whereas 85-90% is towards interest. As a result, the tenure of the loan gets elongated.
As per the amortisation chart (a table that gives details of the periodic principal and interest payments on a loan and the amount outstanding at any point of time), from May 1, 2011, onwards till December 1, 2016, the amount adjusted towards repayment of principal is just in two digits varying from . 41 to . 98, which means the repayment of loan will get extended. The initial period which Paranjape had availed was 240 months but with increasing rate and increase in tenure, he will be able to clear the loan only on March 1, 2038. This means a small loan of . 300,000 taken initially will now be repaid in 36 years.
What is the interest amount which Paranjape will be paying?
Till October 1, 2011, Paranjape has already paid interest of . 2,95,584. As on date, the present loan amount outstanding is shown as . 2,59400. (Out of the EMI, only . 40,600 have been appropriated towards principal during the last nine years). If he chooses to continue till the extended period, he will have to pay a total interest of . 12,14,406 at the present rate of interest indicated by the bank, namely,17.25%.
If the interest rate increases further, the interest amount too will go up, and perhaps the tenure.
What can be done under the given situation?
There are three options:
a) Pre-pay a part of the amount so that the EMI and tenure do not change
b) Shift to a new lender as you will be granted loan at a rate which is applicable to new borrowers and generally at a better rate
c) Try to manage for payment at a higher EMI by cutting down expenses wherever possible so that you save on the interest cost.
Source – ET, Feb 17, 2012