Muthukumar K & Bakul Chugan
The Economic Times (Mumbai edition)

Rakesh Chopra might not be lucky to get the helping hand of Spiderman, but then his immediate boss is a big hope. He is expecting a salary hike – in good measure – this season to save his home loan problem. Equated monthly installment (EMI) on his home loan has increased by 33% for him since the time he has taken the loan.

He took a floating rate home loan two year back, when property prices were sizzling. After constant nagging by his friends, he jumped onto the bandwagon. He bought a house in suburban Mumbai and took a Rs 25-lakh loan for 20 years at an EMI of Rs 20,000. Since then, his EMI has increased by Rs 6,500 – thanks to higher interest rates – crunching his disposable income. Weekend movies and dinners at restaurants are temporarily getting an axe. He is contemplating ways to eke out a living.

Chopra’s case is not alone but of thousands of people who have taken loan two years back. Roughly 20% of loan outstanding has been disbursed at an average rate of 7.5%, which faces risk of default today. Close to Rs 60,000 crore of home loans was disbursed in 2005 at similar rates. Since such loans were disbursed, home loan rates have gone up by 4%. Property buyers are now finding creative ways to stay afloat. The problem is compounded by the fact that banks are unwilling to stretch loan tenures beyond 20 years. And individuals like Chopra, who just turned 35, taking a loan for 20 years or more could mean stretching home loan to his retirement years. A dangerous thing to do, financial planners would vouch.

The only way out is to prepay, feels a section of financial planners. This is because, the initial period of EMI payments mainly goes towards paying interest, and prepaying the loan reduces interest payments – in greater amounts. Money lying in fixed deposits, MFs, and PPF can be used for prepayment. Even relatives and friends can be tapped for money. After all, it’s no use paying the EMI for an 11% p.a. loan while your investments at the most earn 8% p.a. on a post-tax basis. On a net basis, you are only losing money.
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