With the inflationary trend in the economy persisting, more and more lenders are raising interest rates. The country’s largest home loan lenders, HDFC Ltd and ICICI Bank, joined the bandwagon on Monday, increasing interest rates on home loans by 0.50 to 0.75 percentage points.
This means all fresh borrowers and those existing customers who borrowed under the floating-rate option will now have to shell out more. This applies not only to home loans, but to all kinds of consumer loans, including car financing. Public sector banks like SBI, UBI and PNB increased the rate by half to one percentage point last week.
The rise may also affect the borrowers because the longer the duration of the loan, the more the impact of the rise in interest rate on your EMI.
Since home loans are normally taken for 20 years, rise in EMI is substantial. For every percentage point rise in interest rate, EMI on a 20-year loan goes up by Rs 68 per lakh. Normally, the size of the home loan in the present scenario is in the range of Rs 30 lakh to Rs 50 lakh. EMI on a Rs 50 lakh loan for 20 years will go up by Rs 3,402 per month. This means an additional annual burden of Rs 40,830.
A senior banker pointed out that the cumulative effect of interest rate hikes over the last three years means that for those who borrowed in 2005, the new EMI would be almost 28% higher than it was when they started repaying the loan. That means, EMI on a Rs 50 lakh loan has gone up by Rs 11,500 to Rs 53,322 after the latest hikes, which means the borrower will now fork out Rs 1,38,000 more per year than he did three years ago.
This is a major cause of concern not only for customers, but also for banks as they are now beginning to fear that rising EMIs might increase the default rate. If it happens, it won’t just be the bank’s profitability that will take a hit. You can be sure they will hike rates even further to cover for the higher risk of default.
But apprehensions of default as EMIs rise mean that banks and finance companies will first resort to increasing the repayment period while keeping the EMI unchanged. However, this may not be possible for many old customers, who have already had their repayment periods extended at the time of earlier hikes.
If the interest rate goes up by one percentage point, the repayment period increases by eight years if EMI is to be maintained at current levels. As the rate has gone up by three percentage points since 2005, most customers of that vintage may have reached the maximum possible repayment period already. In such cases, the increase in interest rates will perforce lead to rising EMIs.
For new customers, however, banks will try as far as possible to increase the repayment period, keeping their EMI unchanged, so that it would not stretch their repayment capacity immediately. Of course, this won’t be possible if the extended repayment period goes beyond the borrower’s super-annuation date.
In any case, whether through higher monthly payouts or a longer period of repayment, borrowers will have to meet the extra burden.
For those who have bought houses on borrowed funds, it’s a double whammy. On the one hand, high inflation at 11.42% is adding to their monthly bills. On the other, the rise in interest rates will push their EMIs substantially upwards.
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