In August 2007, Jain received a mail from his bank asking him to prepay some amount of his loan so as to bring down the tenure of his home loan, which had gone up. Since then Jain has prepaid an amount of Rs 1 lakh against the principal outstanding. Fighting against the rising interest rates and inflation, Jain found it worth to partly prepay his loan by breaking his fixed deposit which was earning him lesser than his interest outgo on his home loan. He broke his fixed deposits of Rs 1 lakh to bring down his tenure and the EMI to Rs 5,300.

 Part of the problem, according to Jehangir Aziz, principal economic advisor in the Ministry of Finance, is the absence of a good repository of credit information. For instance, in the US, all mortgage rates are credit rating based. “In the absence of credit information, risk is not priced properly so that only current income provides a basis of negotiating with banks.” Organisations such as CIBIL, set up in 2000, that aim to provide credible credit information to loan providers, will bring about the crucial change and simultaneously help price loans differently to loan seekers based on their profile.

Jain feels sad about his decision to have gone for a floating rate home loan at a time when he was considering locking himself with a fixed rate home loan. He admits, “The banks representative, while offering me the home loan asked me to go for a floating rate home loan saying that the interest rates are bound to come down (which they did for some time) and won’t go above the current levels. I think if I would have taken a fixed rate loan I would have fared better.”

... contd.