The Hindu Business Line : Customers wail as banks hike EMIs on home loans

Sudden impact
1 percentage point rise stretches tenor by 5-8 yrs
EMI marked up if tenor extended beyond 5 yrs
Repayment period not extended beyond 20 years

Mumbai May 15 Naina Sharma, a 33-year old professional at a multinational firm, was in tears when the equated monthly instalment (EMI) of her home loan jumped from Rs 27,400 in April to Rs 31,000 in May.

"I am worried. What if I default? Why wasn't I called and told about it when they have my mobile number," she asks. Ms Sharma has taken a Rs 30-lakh loan from a leading private sector bank with a 20-year term at floating interest rate of 11.25 per cent.

Her lament holds true for a large set of home loan borrowers. Banks today prefer to hike EMIs rather than extend the tenor of the loan.

While most banks and housing finance companies give customers the option, a sharp hike in EMI seems to be the best way out for banks to beat a three percentage point rise in interest rates.

"If we have around a million customers, we cannot extend the tenors for all," said a senior public sector bank official.

"We have to be in business and there is a fear that defaults could rise if tenors are extended."

Ms Sharma was told that the repayment period could not be extended beyond 20 years. " I find it strange, because if 60 years is the average retirement age, I have at least an additional seven years to pay off the loan."

A spokesperson for HDFC said that EMIs move up only if the loan tenors go beyond the retirement age of the borrower.

The 2006-07 fiscal saw a steep climb in interest rates. HDFC's floating home loan interest has moved up from 8.5 per cent in March 2006 to 11.25 per cent now.

For ICICI Bank and LIC Housing Finance, the floating rate is 12 per cent and 11.25 per cent respectively.

Going by the thumb rule in the industry, for every one percentage point rise in interest rate, the tenor of the loan gets stretched by 5-8 years. And the EMIs go up by Rs 64 per Rs 1 lakh for a 20-year loan. Most borrowers opt for 20-year loans, said bankers.

Banks begin marking up the EMI if the tenor gets extended beyond five years.

The average home loan borrower from HDFC is in the mid-thirties, while the average term is 13.6 years.

Even as Ms Sharma is scratching her head, bankers continue to debate whether interest rates have peaked.

Mr S.K. Mitter, Director and CEO of LIC Housing Finance, said: "We have seen interest rates of 16-17 per cent. The housing market has tremendous strength."

A senior private bank official said: "The home loan sector is highly price-sensitive and the last two quarters have seen the rates go up by almost 100-150 basis points.

"However, of late, the rates seem to have flattened out and we hope that they will remain steady in the near-term." That's little solace for Ms Sharma.

More Stories on : Housing Finance | Interest Rates

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Cyclone Akash passes; buzz shifts to Arabian Sea

India, Russia avoid `air collision'

Rural housing turns best bet for cement

Mangoes cannot be `gifted' to the US

Reliance reports gas find in two blocks

Suzlon's global biz fuels 21.5% rise in Q4 net

TVS Motor gearing up to take on Japanese biggies

IT sector downplays queries

Private dairies may overtake cooperatives by 2011

Rupee effect: Coffee exporters stop signing new orders

Customers wail as banks hike EMIs on home loans

HDFC parts ways with Chubb

Central Bank of India's IPO in June

Manufacturers upset over retail discounts