Housing loans: Equated instalment nightmare

Having a house of our own is today’s context is a dream of many. Over the years State Mortgage Bank and the National Savings Bank have granted thousands of loan facilities and assisted so many to realize their dreams. of course loans for housing have been obtained after going through a long laid down procedure with the submission of a number of vital documents. The processing of a housing loan is a hazardous task and time consuming exercise for the banks.

The repayment of the loans extends to a period of 15 to 20 years depending on each applications age and repayment capacity. The monthly instalment for even a loan of Rs. 250,000 comes to tidy sum is called an equated Instalment, which is a fixed amount.

During the first five years or so, an unbelievable sum of interest only is recovered from the Equated Instalment. As such, if an inquiry is made with regard to the amount of capital recovered, the answer given is shocking to any borrower. If one fails to deposit money for the instalment of even one-month as a banks’ priority, only interest is recovered from the amount deposited.

Those who are effected by this exercise will no doubt agree with me. Why not the Banks’ Supervision Department of Central Bank of Ceylon intervene into this present method? It is suggested that a careful study and scrutiny of the present operation of recovery method adopted is made to ascertain the exact position. This should be a regarded as a top priority as there are so many who are compelled to pay tidy monthly equated instalments from their meagre salaries for years despite having other priorities to meet.

Taking a precise example, a borrower who has obtained a long term housing loan of Rs 250,000 and who has remitted Rs 4,000 monthly from his salary is surprised to find on inquiry after three years that only a sum of approximately Rs 3,000 only has been reduced from the capital. The entire balance amount has been recovered as the interest component.

Does this theory of fixing the instalment as equated beneficial to the Borrower? However, if interest is calculated for one calender year at the prevalent rate of interest every month, a good part of the capital could be recovered from each borrower every month if the same amount is deposited. This method is more realistic and advantageous to the borrower.
Sunil Thenabadu
Mt. Lavinia