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Sudhanshu Ranade

A 100 per cent increase in repayment period causes 150 per cent increase in cost. HOME LOANS

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Chennai Jan. 26 Housing finance corporations/banks are talking of extending repayment periods to 20 or 25 years so that borrowers can cope with rising interest rates and EMIs. There are also proposals to extend the maturity of existing loans, so long as they get paid before retirement.

For someone borrowing Rs 10 lakh at 10 per cent a year, a twenty-five year repayment, instead of twelve, lowers EMI from Rs 12,000 to Rs 9,000. Net repayments, after tax deductions, would be much smaller — in both cases.

But concessions might not last forever. An increase in the repayment period would increase total interest from Rs 7 to 17 lakhs. A 12-year loan costs 70 per cent of the loan amount as interest, a 25-year loan, 170 per cent. In other words, 100 per cent increase in repayment period causes 150 per cent increase in cost.

Amount set-off

Since repayments over the first 5 to 15 years do not get set-off against the loan, but against 12 or 25 years' worth of interest, seven of the ten-lakhs you borrowed still remain unpaid 15 years into a 25-year loan. Six years into a 10-year loan, less than five lakhs remain.

For a loan taker, there is only a ten-lakh difference in interest costs for someone borrowing Rs 10 lakhs.

A loan maker who puts Rs 50,000 crores in the business (i.e., has an average of Rs 25,000 crores locked up for 12 or 25 years as the case may be), interest earned each year increases from Rs 2,900 crores to Rs 3,400 crores, without any increase in the rate of interest.

More Stories on : Housing Finance | Interest Rates

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