Home loans: How rate hikes hurt

All those who have taken or are taking home loans on floating rates, it is important to remember how the repayment period will increase if the rate of interest goes up by one or two per cent.

The following example is fairly illustrative of how the term will extend.

Bear in mind that most housing finance companies do not change the equated monthly installments (calculated on the basis of the loan amount, prevailing interest rate and the term of loan) and instead vary the tenure of the loan.

So if interest rates go up, you will end up paying the same EMI (equated monthly installments) for a longer period of time and if the rate decreases, you will repay you loan in a shorter period.

To make the situation clearer, we devised a problem with underlying assumptions regarding the loan and asked leading players such as ICICI Bank and Housing Development Finance Corporation to provide solutions for it.

As stated earlier, the idea is to find out what will happen to the repayment period of a home loan if interest rates rise by one or two per cent.

The underlying assumptions to the problem posed to the housing finance companies were:

• The balance loan to be repaid is Rs 10 lakh (Rs 1 million);
• The current prevailing interest rate is a floating 9 per cent rate that is calculated on a monthly rest basis;
• And for the convenience of calculation, we assume that the loan was originally taken to be repaid in a 20-year term.

We asked the housing finance companies to compute how long the repayment period would stretch in these two cases -- if the current balance tenure was 10 years (120 months) or if the current balance tenure was 15 years (180 months) - if rate of interest increased by either one or two per cent. The adjoining table shows the impact.

Home A-Loan

If the rate of interest on your floating rate home loan increases by a per cent, you will end up paying EMI for an additional 10 months -- your 10-year Rs 10 lakh loan term increases to 130 months.

If the rate increases by 2 per cent, the EMI stretches to 141 months.

And the EMI for a similar loan amount taken for 180 months will have to be paid for an additional 49 months or four years, if the rate rise is of 2 per cent!

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