While there have been reports of suicides over inability to repay home loans in the US after the sub-prime crisis, we haven't heard anything such in India yet.
But the task of making ends meet without losing the roof over one's head is stressing people out. So, how do you ease the pressure, even partially?
The shocks
To find a way out, you have to understand how interest rates are set. Banks calculate their own cost of funds from various sources. Above that, they fix the prime lending rate, a rate at which they lend money to their best or least risky customers. Normally, all banks also fix a benchmark PLR.
All loans are linked to the BPLR. When interest rises, the PLR and the BPLR increase. This, in turn, pushes up the rates for the floating home loan buyers, since the rate of interest they pay is linked to the BPLR. Then comes the increase in loan tenure and, subsequently, EMIs.
Longer tenure, higher EMIs. Take the case of a 30-year-old who had taken a Rs 30-lakh (Rs 3 million) home loan in 2004. At an interest rate of 7.75 per cent per annum then, he was supposed to pay an EMI of Rs 24,628 for 240 months to repay his loan.
Typically, most banks provide a loan tenure of up to 240 months. The total interest outgo over this period would have been Rs 29 lakh (Rs 2.9 million). So, the total cost of his home would have been Rs 59 lakh (Rs 5.9 million).
By 2006, when interest moved to 9.5 per cent on the same loan, on the same EMI, the tenure was pushed to 26.61 years. A 1.75 per cent increase in the interest rate pushing up the tenure by 8.61 years!
Image: A pensive man sits on his balcony | Photograph: Manpreet Romana/AFP/Getty Images
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