Spike In Interest Rates Leaves Indian Homeowners In Unenviable Position
India’s sharp rise in interest rates has left many homeowners in an unenviable position: Having a mortgage they’ll still be paying decades after they should have retired.
Some banks in India automatically adjust mortgage tenures as interest rates increase and borrowers are often unaware their loans have been extended.
Take Abhishek Kumbhani and his wife Rashmita. Their mortgage term jumped to 60 years from 25, meaning Abhishek will be at least 90 if he follows the payment schedule.
“I felt like I was trapped,” the 30-year-old said in a phone interview from his home in Surat, a prosperous textile hub in the western Indian state of Gujarat. “I’ve used all my savings and I can’t get out of this.”
The Kumbhanis were caught by a reset clause in their loan contract that meant when the variable-interest rate on the mortgage they took out a year ago increased to 9.21% from 6.71%, the tenure was pushed out to keep their repayments stable.
They’re not alone. More than 40% of the outstanding mortgages from banks and financial institutions in India – about 4.7 million customers owing 8.2 trillion rupees ($100 billion) – have seen an increase in loan tenure, repayments, or both, according to State Bank of India’s economic research wing.
While many economists forecast the Reserve Bank of India has paused its rate rises for this tightening cycle after it left its benchmark interest rate unchanged earlier this month, the recent hikes have caused turmoil for millions of borrowers.
Lessen the Blow
It’s a reflection of what is happening in nations around the world as central banks aggressively tighten monetary policy. Lenders, with the encouragement of governments and regulators, have been looking for ways to lessen the blow to borrowers from the massive surge in mortgage rates, such as lengthening tenures, transferring to interest-only loans and restructuring debt.
In India, homeowners are particularly exposed to changes in interest rates because almost half of borrowers have variable-rate mortgages, compared with countries such as the US where most people have fixed-rate loans.
The pushing out of loan tenures is also particularly startling in a nation where many people are debt-adverse and mortgages are regularly paid off within an average of eight years, according to fintech firm Bajaj Markets.
“Buying a home is an emotional product – it will be the last thing customers will default on even if they are under stress,” said Ambuj Chandna, head of retail at Kotak Mahindra Bank.
Indian lenders allow borrowers to maintain the original tenure of their loan if they increase monthly repayments. This was an option the Kumbhanis initially explored despite Abhishek’s uncertain income from working as a freelance web and mobile application developer. Customers can also shop around other banks for more competitive offers and refinance their loans.
“Both the banks and the borrowers are to be blamed for this situation,” said Mahesh Mirpuri, a mutual fund distributor and a social media commentator on financial issues. He argues that some banks could have better communicated scenarios outlining what may happen when rates rise, while many borrowers could have done more research and been more cautious. In many cases borrowers went for the biggest house their eligibility at that time allowed, Mirpuri said.
As Asia’s third largest economy emerged from two years of strict lock down, Indians splurged on shopping and traveling, pushing card spending to record – a phenomenon economists call revenge spending. Many also bought houses and cars after vaccines rolled out and the pandemic ebbed.
India made one of the fastest recoveries among major economies, but that also fanned inflation above the central bank’s target. The RBI responded by raising interest rates 250 basis points between May 2022 and February.
While economists forecast the RBI has now paused for this cycle, if the central bank resumes raising rates it will really hurt the consumer, said Abizer Diwanji, head of financial services at EY, as affordability for all kinds of retail loans is diminishing with every small increase.
Kumbhani, who had his loan tenure extended to 60 years, managed to reduce it to 30 in the last few weeks by increasing the repayments and partly paying some of the principle. But he hasn’t discussed the issue in detail with his wife, Rashmita, fearing he’ll upset her. “That will only increase my stress,” he said.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)