What Forces Banks to increase EMI on home loans?

A new shift has taken place in the Indian home loan sector. The rising interest rates in the country today have brought this debt trap to the threshold of households. For the past few years, the floating interest rates on home loans have shot up to 11 per cent from 7.5-8 per cent. Covering the interest component would have become a little difficult for the home loan borrowers if banks and other financial institutions had not increased the e quated monthly installment (EMI).

A home loan consumer who cannot afford paying high EMI will theoretically end up paying in perpetuity. This has reasons:

Rate of interest and Principal are two basic components involved in an EMI payment for any loan. Talking about first few years of loan repayment, a majority of time goes in paying up the interest, which seems bothersome to all borrowers. As for the latter half of the payment part, when a borrower has paid much of his interests on loan, the principal repayment increases.

Today, when home loan interest rates are high everywhere, banks have the ability to increase tenure up to a certain point. If the interest rate continues to increase, the EMI becomes deficient to cover the loan amount. Moreover, increasing the time period has not also been a solution to cope up with the rising interest rate on home loan. For that reason, banks are forced to increase the amount of EMI all in all.

As per the current scenario, inflation has emerged as one of the leading factors encouraging banks to increase rate of interest on home loans thereby bringing a drop in number of home loan shoppers. The solution is for municipalities and states to allow more residential development on the land. This will bring more legal colonies, strong infrastructure, and the citizens will find themselves in a better position to buy houses. Asset inflation will be under control and prices and EMIs will become affordable.

However, this is the case when significant reforms will be pushed by the concerned authorities. Meanwhile, the lay man will continue to suffer and pay high EMI and interest rates on home loan by cutting on everything.

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