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Negative amotization due to interest rate increase

Negative amortization due to interest rate increase

Apnaloan.com Research Bureau

16 Apr 2008

The banking industry and the loan players expect a hike in interest rates on home loans in face of a stricter monetary regime.

This tightening could hit hard, especially those loan borrowers who took housing loans at 7-8 per cent few years ago. The consequent condition best known as negative amortization in financial jargon may emerge.

Negative amortization is a situation when repayment of loans does not cover the amount of interest due for that particular loan period. This ultimately leads to a loan default.

The impact of raising rising interest rates may be such in case of those borrowers with longer home loan tenures.

Negative amortization happens when the loan tenure is of 20 years or more. Media reports have quoted DHFL Vysya Housing Finance managing director R Nambirajan saying that, "Loans with a 20-year repayment period should be restricted and be allowed if an Income Installment Ratio (IIR) is not more than 30-35%. When the IIR is low, there can be room for increasing the EMI to cover any rise in interest rate increase."