On a weekend, sitting comfortably on the couch while watching the IPL cricket match between Chennai and Mumbai, I got a call from my landlord. Thinking it was a reminder call for the rent payment, I answered it up only to get the shock of my life. The landlord informed me that he would be increasing the rent after the current tenure of my leave and license agreement comes to an end. My request for considering a lower hike met with resistance as the landlord had his own reasoning for doing so. The bank has hiked its lending rates and will be adjusting the rate available to him on his home loan - based on the fact that it was a floating rate loan. The increasing EMIs would be next to impossible for him to manage at a lower rent or continue at the same rent going forward.

The RBI has hiked rates in a bid to control the spiralling inflation levels but this will eventually lead to housing and various other loans becoming more expensive in the near future. This would ultimately result in higher EMIs. So how do you manage these rising EMIs particularly if incomes do not rise or your hike in income is away for a while now? At the time of applying for a loan we generally tend to calculate how we would pay it in the long run, keeping various circumstances in mind. But these are the kind of situations which result in our calculations going haywire. You can do nothing in such cases except for bearing the burden of the rising EMIs. The question is how does one get the extra money from? Should cutting down on expenses be an option or can you make any other arrangements?

Accepting the problem is the first step towards exploring a solution. So, first of all we must accept the reality that these rate hikes by the RBI would definitely impact us. There are many people who ignore these important developments thinking that these would affect the banks and not them. However, the reality is that ultimately the costs will be passed on to the end consumer and they will have to pay for them through increased interest rates and consequently higher EMIs.

Suresh Sadagopan, a well-known financial planner, says, “The move by the RBI will have a direct as well as an indirect impact on the ‘aam aadmi’. Anyone who has borrowed money will find their EMIs going upwards, which is the direct impact. Businesses borrowing money to do business would find that it has become costly now and would seek to pass on the cost back to the consumers, which will result in increased prices for many items across the board. This is the indirect impact.”

“People with surplus money will be able to get bank FDs and corporate bonds at higher yields while those who need to borrow will have to pay at higher interest rates. People who have already borrowed on floating interest rates will need to pay back at higher interest rates,” says Mukesh Dedhia, a financial planner. However, Srikanth Bhagavat, MD, Hexagon Capital Advisors, begs to differ. He feels that in cases where the EMIs will increase - broadly at current rates these may have increased by about 10 to 15 per cent over last year’s EMI - unless the borrower has over-lever-aged, it should not be difficult to manage the situation. An increase in EMI of Rs 2,000 or Rs 3,000 should not stress the borrower too much in a normal situation.

But the last year has impacted the borrower in two ways - increased interest rates and increase in cost of living due to inflation. Bhagavat adds, “For someone whose EMI constitutes more than 40 to 50 per cent of his/her income, it could prove more difficult to manage. The increased EMI will eat into the home budget and may result in a decreased spend on consumables (due to a lower disposable income) or discretionary goods such as an expensive soap or toothpaste or a dinner in a restaurant. Savings will obviously reduce unless the borrower is on a strict SIP diet. Where the borrower is on a teaser loan, god help him, for the increase will be much more by the time the borrower reaches the second or third year of his/her loan.”[PAGE BREAK]

In the common situation of a long-term home loan, a hike in interest rates translates to an increase in the number of EMIs or the repayment period. The EMI is generally not increased unless the repayment period extends beyond a reasonable age. So if the repayment will go on till the age of say 60 years, obviously the lender will choose to increase the EMI than the repayment tenor.

Since the problem has been recognised, what are the methods which need to be adopted in this situation so that the problem can be tackled smoothly? In other words, what can we do to ease the burden of the increasing EMIs? Sadagopan suggests that pre-payment can be an option if the interest rate is beyond what you hope to earn by investing. “Many loans allow any amount of pre-payment. In some cases the limit for the pre-payment of a loan is up to 25 per cent of the amount outstanding without any charge. Any incentive, bonus, etc could be used to fund the repayment. One should also take stock of his/her investments. If the return on investment is less than the loan interest rates, it is indeed advisable to break the investments and pay off the loans. For example, if your investments earn around 8-9 per cent and the interest on the loan is 11-12 per cent then it makes sense to break the investments and pay off the loan,” he states.

However it could be that pre-payment is not possible and some people would like to maintain the same amount of EMI. In that case they will have to ask the loaner to increase the tenure. Sadagopan further adds that switching loans is also not really advisable. Some agencies may raise the interest rates immediately while others do it with a lag. Over time, most loan rates will be close to each other. There is not too much merit in changing the loan agency due to this and in view of the costs involved. Foreclosure charges are generally 2 per cent of the loan outstanding.

Dedhia also supports this argument. According to him, transferring the loan to another lender is indeed an option though this would mean additional charges such as pre-payment charges, additional paperwork, new loan processing charges and also some government levies or taxes. This may not be an easy option. “The degree of pinch one would feel due to the rising EMIs as a result of the rising interest rates would depend upon the amount of borrowings, the balance still unpaid and the percentage of EMIs vis-à-vis your total income. Prepare your cash flow statement again and see where you can cut corners to accommodate this additional outflow. Else, a better solution is to try to increase your revenue sources so that it not only helps now but also tomorrow. This solution is easily said than done. But if tried and successful, you will be able to convert an adverse situation into an opportunistic one,” he elaborates.

One of the other suggestions is to reduce your discretionary expenditure. However, one should not shift to a fixed rate regime now, for when the rates reduce (which eventually they will), you will be caught on the wrong foot. If you have idle balances in your savings account or FDs, examine the possibility of paying extra EMIs without penalty. Negotiating for a lower rate is a low possibility but can also be tried. If your lender has a linked overdraft account, depositing idle balances into it will help reduce the burden. Some banks such as SBI, HSBC, etc have this facility.