Borrowed for 20 years? Pay for 38

By Ramesh Akkineni
from an article in Financial Express
Welcome back to the pocket-pinching era of high interest rates. You may not have realised it by now, but in the last 18 months, your home-loan rate has gone up 2 to 2.5%, depending upon your housing finance company. And if home loans statements are difficult to decipher, do take a closer look at your current statement, comparing it with the one 18 months ago. Chances are, you will shudder in horror.
Your 15-year loan, at current EMI, has already got extended to 20 years. That is, if the interest rate is up only 2% from 7% to 9%. If the rate is up 2.5%, you will have to pay for 22 years and 6 months. If you took the loan at a little higher rate of 7.5% and it’s now 9.5%, your tenure is now 23 years.
There’s worse news for those who have 20-year loans. If you borrowed at 7.5% for 20 years, your latest tenure at 9.5% is 43, yes, 43 years. Banks will not like you as a customer and would have already knocked on your door to rework your EMIs. But if the original interest rate was 7%, a 2% hike has taken your 20-year loan to 38 years and 3 months--18 years more than your original tenure.
Hypothetically, if you are okay paying the same EMI amount despite the rate hike, and your finance company does not mind risking the loan amount beyond your working life, you could pay that loan for perpetuity. Such a situation is called ‘negative amortisation’. Those who took a 20-year loan at 7.5% or above are now cases of negative amortisation. Which effectively means that the current committed EMI-which typically has a large interest component and a smaller principal payout-is not even enough to pay the interest component.
In such cases, finance companies will either need to increase the amount of EMIs or ask you to pay up a part of the principal amount. Customers with limited years of working life (normally taken at 60 years) have no option but to go in for increased EMIs.

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