Make home loan rates transparent

Font Size

Print

Feedback

Email

Discuss

: Borrowers will be able to anticipate changes to their borrowing rate only when the floating rate on home loans is pegged to an independent benchmarkRising EMI on home loans makes it to the front pages of newspapers regularly. Many of the arguments remind one of the era when loans from large financial institutions were called ‘assistance’. The loan is no longer an act of benevolence by the lender towards the borrower. We need to recognise the rights and responsibilities of the borrower in the contract as well. We have argued in these pages several times that the benchmark for floating-rate home loan cannot be the internal PLR (prime lending rate) of the lender. It is the right of the borrower to be able to expect and anticipate changes to his borrowing rate based on an independent, observable market benchmark. The PLR is determined by the lender and is, therefore, unacceptable as a fair benchmark for floating-rate loans.

That said, in terms of responsibility, the amount of loan has to be decided by the borrower and not the lender. The borrower takes on the responsibility to service the loan out of his income, and needs to take a conscious call about how much he can pay. Unfortunately, most borrowing decisions seem to have been made on the basis of EMI and its impact on consumable surplus for the family, without considering the impact of a floating rate. It is this eagerness to keep EMI unchanged that has led to bizarre recalculation of tenure in the markets, in the light of rising interest rates. Home loan borrowers need to exercise options to pre-pay by liquidating other assets, or take the hit of a higher EMI, rather than clinging to the comfort of an absurd fixed EMI on a floating rate loan.