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Home loan EMI woes

August 22, 2008

Current EMI: Rs 5,500; Interest: Rs 5,430; Principal = Rs 70

"It is a trauma," says a dejected Brijesh Parmar. And he is not talking about his long, harrowing train commute from Mahim, a western suburb in Mumbai where he works, to Kalyan some 50-odd kilometres where he lives.

In fact, Brijesh is talking about his home loan EMI. Brijesh got married in 2002. In October 2004 he bought a flat for which he took a home loan of Rs 5.25 lakh from ICICI Bank. He was 27.

2004 was one of the best times for home loan borrowers as interest rates were down and were expected to dip further with the fall in inflation rate. At around 3 percent then, inflation rate was considered benign and lower interest rates encouraged borrowers like Brijesh to go for their dream homes. The bank then charged Brijesh a floating interest rate of 8 percent.

Unfortunately, for Brijesh and thousands of home loan borrowers like him, inflation began climbing steadily as crude oil prices flared above $ 100 per barrel. This led to an increase in interest rates.

This is where Brijesh's trauma lies. Today he pays an interest rate of 12.75 percent on his home loan.

Let us look at how the rise in interest rate has impacted Brijesh's home loan statistics:

Home loan stats in October 2004:

Floating rate of interest: 8 percent
Monthly EMI: Rs 4,500
Payment towards interest: Rs 1,000 approximately
Payment towards principal: Rs 3,500
Tenure: 20 years or 240 months

Home loan stats in July 2008:

Floating rate of interest: 12.75 percent
Monthly EMI: Rs 5,500
Payment towards interest: Rs 5,430 approximately
Payment towards principal: Rs 70
Tenure: 37 years or 447 months!

Though his overall EMI payment has increased by a paltry Rs 1,000 in the intervening period compared to his quadrupling monthly salary, the staggering difference in the principal amount he is paying now and what he paid four years back is what upsets Brijesh most.

"If the RBI increases interest rates by another 0.5 percent then I will be paying interest at the rate of 13.25 percent," Brijesh says expressing his fears. Right on cue, inflation for the week ending August 19 zoomed to 12.63 percent, a 16-year high. In stark contrast, inflation was only 4.24 percent during the corresponding week last year.

Not only has Brijesh's EMI amount increased but his tenure too has gone through the roof. "At 12.25 percent my home loan tenure has increased to 447 months, a huge increase of 207 months (it was 240 months in 2004) despite paying EMIs for more than 36 months now," says he bleakly.

Though his monthly income has almost quadrupled in the intervening period the thought that only Rs 70 goes towards principal payment out of an EMI of Rs 5,500 rankles him no end. "It is worse than what private moneylenders charge today," he adds angrily.

However, his anger soon transforms into a sense of relief when he reveals that he plans to repay his outstanding home loan amount in the next three years.

"If I can save at least 50 percent of the interest that I am currently paying and make some sensible investment decisions, like putting the amount in my PPF account I will still earn 8 to 8.5 percent interest on it along with the tax benefit that I will get under Section 80C."

Brijesh believes prepaying his home loan will be profitable in the long run. While he does get tax benefit on repayment of interest and principal on his home loan, he still considers his home loan as a liability.

"If interest rates continue to grow at this rate then I will be the owner of a 600 sq ft area after approximately 37 years," he moans.

Text: Prasanna D Zore | Photograph: EMMANUEL DUNAND/AFP/Getty Images

Also read: Quiz: How much do you know about your PAN?
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