“Let’s buy a house,” said the boyfriend. “I am tired of negotiating with landlords after every 11 months.”

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“And where will we get the money from?” I asked rather innocently.

“Oh, that’s simple, we will take a home loan from a bank.”

“And? What will we do after that?”

“Buy a house!”

“And you think we will get a loan that will be good enough for us to buy a house?” I asked.

“Now that, my dear, is the tricky question.”

“Home prices are way beyond our affordability level right now. And more than that interest rates are also on their way up.”

“Hmm. But what has purchasing a house got to do with interest rates?”

“Another basic question. You are an MBA yaar. Didn’t they teach you anything at the business school?” I said in a mocking way.

“Well, you know that I’am specialised in HR.”

“Guess that explains it.”

“Does it?”

“Yeah. It does.”

“So tell me how interest rates impact the entire thing?”

“Let me explain this through an example. Let us say you take a home loan of Rs45 lakh at the rate of 9% to be repaid over a period of 20 years.”

“Seems doable,” the boyfriend interrupted.

“Did I ask you for your view? Don’t interrupt me.”

“Sorry darling.”

“So the equated monthly installment (EMI) in this case would work out to Rs40,488,” I explained, working out the rather complicated math by using the PMT function on an excel spreadsheet.

“Okay.”

“Now let me extend this example. Let us say interest rates rise to 10.75%. By paying an EMI of Rs40,488 it would take nearly 51 years to pay off the loan of Rs45 lakh.”

“Oh. It would make such a huge difference.”

“And wonder what happens when the interest rates rise to 11%?”

“No. What happens?”

“The borrower reaches a stage where he will never be able to pay off the loan,” I explained.

“Oh. How does that happen?”

“At an interest rate of 11%, the per month interest on a loan of Rs45 lakh works out to Rs41,250 per month. And what is the EMI?”

“The EMI is Rs40,488.”

“The interest is more than the EMI and so there is no chance of ever repaying the loan. Hence, technically the home loan repayment stretches to infinity.”

“Oh this is like the Hindi films of yore with the evil zamindar going after the humble kisan’s family for not being able to repay the loan. Abhi to kewal sood de rahe ho, mool to abhi baaki hai (you are just paying the interest the principal still has to be paid),” the filmi zamindars used to say.”

“Now that is a nice way of putting it,” I said.

“Thank you. But the example we have been discussing, isn’t that rather exaggerated?”

“Yeah, exaggerated to the extent that no bank will let a loan reach such a stage, for the simple reason that no bank will take the risk of a home loan tenure reaching 50 years. They will start increasing the EMI before any such thing happens or ask the borrower to prepay some amount. Also, you must remember that home loan interest rates are low for newer borrowers and are currently in the range of 9.5%-10.5%. But for a lot of existing borrowers the rates have even gone to as high as 15%.”

“Oh I didn’t know that.”

“I don’t blame you.”

“You talked about the bank increasing the EMI or asking for a prepayment. How would that work in the example that we have been discussing?”

“If the borrower wants to continue paying an EMI of Rs40,488, and pay off the loan which now charges an interest of 11%, in 20 years, that would mean repaying around Rs5.75 lakh and thus bringing out the quantum of the loan outstanding to Rs39.25 lakh. Only then, the same EMI can be maintained.”

“But wouldn’t that be a difficult thing to do?” interrupted the boyfriend.

“Yes. It would be.”

“So what’s the way out?”

“The other way out is to increase the EMI by around 14.7% to Rs46,448.”

“Oh, even that would be difficult. Isn’t there any other way?”

“Yeah. Hope that your boss gives you a good increment next time,” I said having the last laugh.The writer works in the financial services industry and can be reached at chandniburman@yahoo.com. Views are personal.