John

The back-to-back rises in the interest rate by the RBI within a few months has caused as impact on both new and existing home loan borrowers. The interest rates have gone up by almost 50 per cent in the last one-and-a-half years making the EMIs sky-high.

The home loan interest rates, which were 7.5 per cent on January 1, 2005, rose to 8 per cent on July 1, 2005 and then rose further 0.5 points to touch 8.5 per cent on January 1, 2006. On April 1, 2006, it rose further to 9 per cent and at present the floating rate loan is around 11% at least.

As more and more people struggle to pay the increased EMIs they are further worried that any more raise in the rates will strain on their already stretched monthly budgets.

Possible options to balance the monthly budget:
-If it is possible one can pre-pay a portion of the loan to keep the EMI at the same level. In most cases banks do not charge for partial pre-payments and hence this is an excellent option, but in that case the hard earned savings would be used up.

-Sometimes the bank can increase the loan tenure and keep the EMI at the same level. However normally the bank will not increase the tenure beyond the retirement age (normally assumed at 60 years for salaried people and 65 years for self employed people).

-Another option can be accepting overdraft loans against the savings and bonds (insurance policies, Mutual fund units, shares, etc.) to pay for the increase in the EMIs. The advantage of such loans is that one gets an option to pay interest only for what is actually utilized and as long as the total amount does not exceed the limit there is no need to pay off either the interest or principal. But this is only a temporary solution.

-Sometimes the existing lender can be approached to provide an additional loan on the security of the same house. It is highly possible that one is eligible for the additional loan as house prices have gone up significantly in the last 2 years and the income has also probably gone up.

But neither of the above two options are great options because it is actually borrowing money to repay the existing borrowings which is fiscally imprudent. Hence they must be exercised after due caution.

The best option off course remains to re-equip your budget and cut out the non essential items and manage within your monthly income.
Best of luck with this difficult exercise.