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What is Meaning of Negative Amortisation in respect of Home Loan?

Negative Amortisation happens especially at the time of increasing interest rates (like now) when EMI is not able to cover the interest component and unpaid interest amount is being added into Principal. It is like situation of Deb Trap when with each passing month instead of reduction in Home Loan, Home Loan is increasing.

To resolve this, RBI has issued circular in this month where RBI has directed the Banks and NBFC that at the time of increase in interest rate, give option to borrowers that either they can increase EMI (by keeping tenure of Loan Same) or can increase the tenure of Loan (by keeping EMI Same) or combination of both. Further, RBI has directed the Banks that increase in tenor should not result into Negative Amortisation.

So Please always check with Bank whether your EMI amount is able to cover the interest component.

Solution to this problem of Negative Amortisation is either to increase the EMI amount or prepay some Principal amount.

Please connect Fab Gyan(@Linkedin) for detailed analysis of issues surrounding Finance including GST.

For other reliefs given by RBI, please refer the Circular.

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