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Home loan: How to cope with rising EMIs

August 29, 2008

How badly is the EMI (equated monthly instalment) of your home loan messing up your budget?

Over the last four years, the interest rate on home loans has risen from the bottom of about 7.75 per cent in 2004 to about 12.75 per cent now for existing customers.

During the initial period of the rise, your lender bank or housing finance company (HFC) increased the loan tenure, till it went up to the end of your expected working life.

Then it started bumping up the EMIs. Your total interest burden would have more than doubled from what it was in 2004 unless you have already prepaid substantial chunks of your principal.

This larger loan burden comes at a time when rising prices are putting pressure on your budget anyway. To cap inflation, the government and the Reserve Bank of India have been tightening the screws on liquidity. The

RBI has increased the cash reserve ratio (the amount banks set aside with the RBI) and the repo rate (the rate at which banks borrow from the RBI), sucking out cash.

So, banks are having to pay higher interest on deposits to bring in cash. To make money on these higher-cost funds, they have had to hike lending rates. This has pushed up the overall interest rates.

The biggest impact of this increase is on home loans. Those who took fixed rate loans have been guarded against this since the rate is likely to be reviewed after five years or so.

However, those who took floating rate loans have borne the brunt of the rate hike, seeing their repayment tenures and EMIs shooting up.

Text: Sunil Dhawan & Pankaj Anup Toppo, Outlook Money

Image: An advertisement for home loan modifications hangs on a suburban telephone pole in Moreno Valley, California | Photograph: David McNew/Getty Images

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