Not so long ago, your dream home was just a loan away. Low interest rates coupled with the ease of availing loans set off a housing boom that was as much a reflection of a prospering middle class as a sign of ‘India shining.’
Lately, the dream has gone sour. A sharp spike in interest rates over the last two years has placed an unexpected burden on millions of middle class families, many of whom are spending sleepless nights battling high inflation and risk defaulting on loan repayments.
“I’ve stopped going out on weekends and eating out is becoming less of a habit,” said Manoj Sah, manager with research firm First Rain.
Sah, who took a 20-year, Rs 28-lakh loan three years ago, has since had the mortgage tenure extended to 25 years and the monthly payout (EMI) revised upward by Rs 5,000. He expects his EMI to go up by Rs 3,000 again after the latest bout of monetary tightening by the Reserve Bank of India.
The RBI on Tuesday increased the rate at which it lends to banks in the short term and ordered them to hold more reserves in cash - measures that are expected to result in another round of increase in home loan rates. Like Sah, the hardest hit are borrowers who had taken loans on a floating rate - that is what most people do these days.
Floating rates have increased from a low of 7 per cent in late 2004 to as high as 12 per cent now. Chances are these will go up again, at least by half a percentage point. "I see the interest rates going up by around 50 basis points within a fortnight," says K. Raghuraman, executive director, Punjab National Bank.
In late 2004, a 20-year, Rs 20-lakh loan came with an EMI of Rs 15,505. Today, it risen to Rs 21,482. When rates are revised upward, banks offer to keep the EMI unchanged by extending the tenure - the underlying logic being not to unsettle the borrower's household budget, wherein he or she is pushed to default.
But there are limits to doing this as, for most banks and most customers, the tenure can be extended up to a maximum of 30 years. For people in their late 30s or early 40s, most banks keep the cap on tenure at 25 years.
So, the EMI must be revised upward. That's what has happened to Sah, who is now forced to cut corners so that he doesn't default. But there are many on the brink of defaulting. They are either looking for additional income or exploring to pay off part of the loan by breaking fixed deposits.
Prepaying, if you can, is the best recourse, said Surya Bhatia, a New Delhi based financial planner. Not all may even have that option, though.