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Home Loan Repayment And Effect Of Inflation
February 19 2007 , 10:21 AM   #1
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Home Loan Repayment And Effect Of Inflation

Inflation is the rise in general level of prices as against the purchasing power of people. An out of control northward-bound inflation is detrimental to the economic fabric of a nation. Be it demand-pull inflation or cost-push inflation, inflation hurts people, particularly those who have locked themselves in fixed instruments, like pensioners. Inflation is reined by increasing interest rates. When the central bank hikes interest rates, it reduces money supply. This is the oldest method of controlling inflation. A conspicuous fallout of inflation is the hike in interest rates on home loans.

If it is bad news for floating rate borrowers, fixed rate borrowers have no reason to rejoice either. Certain clauses in the home loan agreement empower the lender to hike the rates of even the fixed rate borrowers. A home is the single biggest investment that an individual makes in his lifetime. The tenure over which he has to shoulder the burden of debt is a long decade or two. Inflation is constantly heading upwards. Hence, it is time for debt ridden borrowers to get down to serious financial planning in order to meet their financial commitments towards their loans.

Today, borrowing to own a house is a good strategy as the asset appreciates in value; borrower lives under his own roof and avails tax benefits. Consider the situation where a borrower pays Rs 20,000 every month towards home loan repayments. Assume that constant interest rate hikes push his monthly EMI to Rs 30,000 the next year. While his income has not increased so much, his other expenses have gone up too. Then, the borrower starts feeling the pinch of meeting his commitments towards his home loan. If EMI increases, and when there is no proportional increase in income, and other expenses increase, the borrower starts cracking under the pressure of debt.
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