How to cope with a rising interest rate regime

In the last two years, interest rates have gone up by 200-250 basis points, owing to constant base rate increases made by the RBI. Ten increments in the last 15 months, in a bid to curb the upward spiralling inflation, have left many a home loan customer with serious woes. Battling the rising EMI, extended loan tenures and higher interest while meeting regular expenses in inflationary times is bringing back memories of the mid 90’s, when interest rates were as high as 16-17 per cent.While things have not got that bad yet, interest rates of 10.5-11.5 per cent offered by most banks and lending institutions, as compared to the 8 per cent a couple of years ago, represent a substantial jump. And, with expectations that the RBI will increase rates by another 50 basis points in the near future, things are not looking good for your EMI payments.

Jayant Pai, a certified financial planner, says, “People are cutting down other expenses, or going for extended tenures to meet EMI payments. Refinancing is an option but considering the expenses involved, and with banks over scrutinising own fund prepayment, it isn’t always easy. Liquidating low yielding assets and prepaying part of your loan could be done, but most people have already done this during the early stages of interest rate hikes.”For people on the wrong side of 40, extending loan tenures is not an option, and with the base rate moving from as low as six per cent in 2009, to 9.25 per cent now, coping with EMI payments is getting harder.

The central bank, in its third financial stability report (FSR), said, “Banks need to remain vigilant to the headwinds from the prevailing inflation and interest rate situation which may affect their asset quality as changes in interest rates were found to have the most significant (negative) impact on the slippage ratio of banks.” Sanjay Mishra, a 28-year-old salaried professional, had taken a home loan of75 lakh in May 2008. The loan tenure was for 15 years and at an interest rate of eight per cent, the71,674 EMI payments were manageable within his1.5 lakh monthly salary. June 2011, and the interest rates have now risen to up to 10.5 per cent, taking Sanjay’s EMI to82,904. While this rise may have been distributed over the last 15 months, the fact is Sanjay now pays a 15.66 per cent higher EMI.

This, along with the inflation burden, added expenses, and wanting to plan for his newborn child, has derailed his financial plans considerably, for unlike with an auto loan wherein one can afford to lose the asset, a home is not something one ever wants to give up.On the other hand, there are people like Pawan Khanna, a 48-year-old advertising professional, who took a home loan in 2005. The loan amount of65 lakh for a period of 10 years, at an interest rate of seven per cent, had his EMI at75,470. Six years down the road, with an interest rate of 12.25 per cent and slated to go up, his EMI of94,198 is weighing him down. Majorly cutting into his retirement planning, as one tends to allocate more towards this corpus at the later stages of one’s career, and with rising medical expenses, Pawan is at more of a loose end than most. His bank could not restructure the loan to increase the tenure (owing to him being so close to retirement) and ease the EMI burden, like what Sanjay had to finally go for. Vipul Patel, director, Home Loan Advisors, says, “As for existing clients, there is limited or no flexibility available on adjusting the loan tenors to accommodate the increased rates. It is anticipated that the latest amendments in pricing will have an impact on EMIs more than on loan tenors.”