India 360: What to do if EMIs hurt

Bank interest rates have gone up by close to 50 per cent in the last one-and-a-half years while for borrowers; the EMIs are already hitting the sky. The successive rate hikes by the RBI within a few months have impacted both new and existing home loan borrowers.

The home loan interest rates, which stood at 7.5 per cent on January 1, 2005, rose to 8 per cent on July 1, 2005 and then gained another .5 points to touch 8.5 per cent on January 1, 2006. On April 1, 2006, they were raised further to 9 per cent.

Millions of borrowers are today spending sleepless nights, wondering how to manage the EMIs and their monthly budgets. "Thanks to the increase in interest rates, I will now have to pay EMIs till the time I retire. You simply can't enjoy the money you earn these days," says Senthikumar AS, a home loan borrower in Chennai.

How does one control the EMI surge in such a situation? Is the Indian middle class getting into a debt trap?

These were the questions addressed on CNN-IBN's prime-time show India 360 on Thursday evening. The CEO of Apnaloan.com, Harsh Roongta, also answered some queries of harried customers and shared tips on how to trim the bulging EMI on the show, which was hosted by Karma Paljor.

Ashish Saxena, Bareilly: I have a loan of Rs 8 lakhs from ICICI for 20 years. After the interest rate hike, the tenure of the loan has increased to 30 years. The EMI, too, has risen from Rs 8,900 to Rs 10,000. How do I manage my expenses?

Harsh Roongta: There are a couple of options that people can look at. The first, of course, is to tighten the belts and try and pay the increased EMI. If that is not an option and if you are young, you can try and get the tenure increased. This will ensure that your monthly budget is not affected.

If that is also not possible, then you will probably have to dip into your savings to pre-pay a portion of the loan to such an extent that the EMI and the tenure don't change. Just for a rule of the thumb, typically for every 1 per cent increase for a 20-year loan, you will have to pre-pay close to about Rs 6,500 per lakh of loan to keep the EMI and the tenure constant. That could be a good third option.

On the positive side, the rise in the property prices also increases your ability to take a top-up loan or additional loan, provided your income has risen and you have maintained a good repayment track record with your lender. This top-up loan can be used to balance your budget. But this is not a great strategy or financially sound advice, because you are borrowing for the purpose of repaying an existing debt.

Viewer from Delhi: I was planning for go for a home loan. But because of the rate hikes, I am giving a second thought to my plans. Should I go for it or should I wait for the rates to fall?

Roongta: I think the decision to be taken is not whether or not to take a loan. The question is, should one go for a home now. The loan is only a means to an end.

For, there are widespread expectations that property prices are likely to soften over the next three-four months. So, the normal rule that "one should not try to time the market when one is buying a home for own residence" has slightly less applicability today because of the expectation of fall in the property prices.

But people, who are completely risk-averse and can't take the risk of further rise in property prices, can probably look at buying a home and, therefore, go for a home loan now. But my advice to the rest would be to wait for three to six months and see how the property prices react to the spurt in the interest rates and then take a decision.

Query from a Delhi housewife: I am taking a home loan. Interest rates are increasing everyday. Should I go in for fixed rate or floating rate?

Roongta: It's a million-dollar question. First, it's not a one-time decision. People have a misconception that if one takes a fixed loan, he or she doesn't have to look at the decision for the next 15 or 20 years. That's not true. Even if you take a fixed rate loan today and the rates drop dramatically tomorrow, you should change that after taking the costs into account.

Today, our advice to customers has been to go in for a floating rate loan. The difference between fixed and floating rate loan is 2 per cent at present, which is very high. The rates have increased to a very high level and one must not forget that it's a cycle. We have seen one full cycle. From 2000, it has dropped and come back again to almost 2000 levels. And I have no doubt that we will see the cycle again. It's not a question of 'if', it's a question of when.

Karma Paljor: But not all fixed loans are fixed, isn't it? There are variables there also.

Roongta: True. What is passed for 'fixed' is not necessarily fixed. Only a few banks offer what we can say a genuine fixed rate loan. Which means the bank has no right to change the rate at all during the entire tenure. Only 2 or 3 banks offer that kind of a facility. Most other banks offer fixed rates, which will change based on different kinds of clauses or they are fixed only for a couple of years.

Query from a Delhi youth: I had taken a home loan last year. In view of the latest hikes, should I get my loan tenure increased to keep the EMI unchanged? Is prepayment a better idea?

Roongta: if you have the money, you should go in for prepayment. The tenure extension option should be exercised only if you don't have the money to pre-pay.

Karma Paljor: Aren't there other options? Will a bank allow you to pre-pay from your savings without actually having to pay any penalty?

Roongta: Absolutely. Most banks don't charge any penalty for partial pre-payment. That is true of almost all the major banks. So, if you have the money, pre-payment is no doubt the best option.

Karma Paljor: What happens to the tax liability? Will one be saving more under Section 80?

Roongta: Whatever you pay as a partial pre-payment is eligible for relief under Section 80C as principle pre-paid. Today, the rate of interest is so high, I think the government needs to examine the tax issue for the high-value consumers. For most normal consumers, it will work out if they are not utilising their entire 80C limit. Even if it doesn't work out tax-wise, it may still be financially prudent for you to prepay.

Query from a Mumbai viewer: With each hike my EMI keeps increasing. Is there a better way to somehow pre-pay my home loan? Where do you the money from?

Roongta: It's definitely better to pre-pay. And the money can come from the good old Indian family institution. This is as good a time as any to go back to the family tradition. It has to come from your savings. And right now it's a good time to break your savings a pre-pay the loan if need be.

Karma Paljor: Is there light at the end of the tunnel? You say there it's a cycle and the time of low interest rates will come again. But how soon will it come?

Roongta: Well, if I could answer that correctly, I would make a killing on the money market, won't I? But interest rates do move in cycles. There is history to prove that interest rate cycles go up and down. It's not a question of 'if the interest rates will go down', it's a question of 'when'. I won't be able to hazard a guess as to when the interest rate cycle will turn. But it's a sure bet that at some point of time, it will turn.

Karma Paljor: Also since the property prices have gone up, could this balance out the high interest rates?

Roongta: Absolutely. And when property prices drop, you can afford the home in spite of the hike in interest rates.

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