With banks and finance companies raising home loan rates by about 250-300 basis points in the last year-and-a-half, the risk of passing on the loan repayment to the next generation has become a distinct possibility.

You may have taken a loan at the age of 35, hoping to finish repayment by the time you retire from service, but your son may end up paying the EMI (equated monthly installments) and finishing off the loan as high interest rates are now pushing up EMIs and tenures.

The debt trap is much worse than what customers earlier thought. What has added to the burden is the prepayment fee of up to 2 per cent (of the outstandings) being charged by banks.

Banks and housing finance companies are acutely aware of the problem and many have started calling individual borrowers, who find themselves in a tricky situation today. "Realising the gravity of the situation, many banks like SBI and ICICI Bank are allowing customers to extend the tenure to 30 years. Other nationalised banks may follow suit soon," said an official of a nationalised bank.

For instance, a 35-year old may have taken a Rs 75 lakh loan two years back on a floating rate of some 9 per cent with a tenure of 20 years. His equated monthly installment will be Rs 67,480. At 55, well before his retirement, he would be debt-free. However, this calculation has now gone haywire.

For, inflation and sustained monetary tightening were something that the customer did not quite budget for. So, given the same loan amount, if interest rates have risen to 12.25 per cent, the same borrower's EMI has risen sharply by over Rs 15,000  to nearly Rs 83,893. A commitment he finds difficult to meet.

So, he seeks to lower his burden. The tenure increases to 30 years, beyond the retirement age of the individual. Instead of ending at 55, the loan will continue till he reaches the age of 65. An inter-generational loan, going beyond the productive life of an individual.

... contd.

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