Rising interest rates hitting you hard? Here’s how to ensure your home loan is paid off before retirement

• You may increase your EMI to up to 40-50% of your income at the most.
  
• Prepayment should be considered only if one has enough savings.
  
• Consider refinancing only if you stand to gain at least 50 to 100 bps reduction on your current loan.

Home loans are long-term loans which mostly have a tenure of 15 years or more, and interest rates could go up and down during this period.

However, a recent series of rate hikes has been nightmarish for home loan borrowers. Between May 2022 and February 2023, the Reserve Bank of India (RBI) raised the repo rate by 250 bps. New home loan borrowers who took their loan under the external benchmark-based lending rates (EBLR), have seen their home loan interest rates rise the quickest in tune with the repo rate hike.

When the rates move up or down, the industry practice is to change the tenure of the loan as it is convenient for the customer. “However, customers who would not like the tenure of their loan to increase can approach their lender, and increase their EMI or even partly increase their EMI, and partly tenure. There is no cost to change the EMI or tenure,” says Renu Sud Karnad, managing director, HDFC.

She adds that most lenders, including HDFC, have a process in place that if extension of the term goes beyond a certain comfort level, the customer is educated about the need to revise the EMI. Hence it is advisable for the customers also to stay in touch with their lenders.

How the recent interest rate hikes will affect you

Theoretically, for a 15-year loan, a 2.5% increase from 7% to 9.5% means that the tenure goes up by 90 months or 7.5 years. “For longer tenures like 20 or 25 or 30 years, the additional tenure can be as much as 20 additional years, depending on rate of interest,” says Adhil Shetty, CEO, BankBazaar, an online financial marketplace.

Given that the interest rates on home loans have gone up substantially since last year, the lenders prefer to increase the EMI to ensure that the tenure does not go up by more than a few years. “If you are in the middle of your repayment period and have more than twice the remaining tenure to retire – say you are half-way through your 20-year loan and are in your late 30s or early 40s – the lender may extend your tenure instead of increasing your EMIs, especially if you have been prepaying your loan,” says Shetty. However, if you are in your late 40s or early 50s you would have to close the loan by the time you reach retirement age.

What you can do

In such a situation, a borrower has several options open to him.

Increase the EMI: If the borrowers have a significant portion to pay off, they can increase their EMI until they are 60 to 65 years of age (depending on their lenders). “In these cases, borrowers can increase their EMI by 5% once a year. This annual exercise will increase your tenure and buy you some more room to pay off the loan amount,” says V Swaminathan, executive chairman, Andromeda Loans, a loan distributor. As a rule of thumb, your home loan EMI should not be more than 35-40% of your income. Even if you stretch this, most banks will restrict your home loan EMI to 50% of your income. Thus, increasing the EMI beyond a certain point is not feasible.

Prepay your home loan: Another option is to prepay the home loan, which means paying a part of the loan amount earlier than the planned repayment period. “In the case where it is not possible to increase one’s EMI, one option is to prepay strategically to reduce the impact of the rate hike. Prepayment should be considered only if one has enough savings. In case the customer does not have enough savings, he could instead focus on making small pre-payment each year to increase saving on the home loan,” says Pramod Kathuria, founder & CEO, Easiloan, a digital home loan marketplace.

However, out of 5.5 million home loans linked to EBLR, only 0.82 million have the capability to make prepayments to ensure their tenures or EMIs don’t shoot up, as per an analysis by SBI research. Those who are not able to prepay their home loans may consider some other options to pay off their home loan before retirement.

Get a co-applicant: “If you are nearing your retirement but still have not repaid a significant portion of your loan, you can try securing a co-applicant or a guarantor,” adds Swaminathan. If the co-applicant’s retirement is at a later stage, one can convince the bank to increase the tenure.

Refinance your home loan: The other option is to refinance your home loan. Some lenders have slashed their home loan interest rates in light of reduced demand. “If your current rate is 0.5-1% higher than the prevailing rates, then refinancing your loan to a lower rate may be a good idea. Refinancing to a lower rate and repaying a higher EMI would be even better. Check with your own lender before you refinance, as it may be an easier option,” say Shetty. Having a co-applicant with a good credit score and a steady income may help you avail lower interest rates.

Home loan borrowers may also be wondering where the interest rates are headed next. “On the interest rate front, in my personal opinion, we are almost at the end of the rate hike cycle considering that factors like inflation could ebb as crude prices, which have the biggest impact on inflation in India, are down to a 15-month low,” says Karnad.

There is no one right option to pay off your home loan before retirement. It depends on your financial situation and the additional monthly outflow you can take up. You can opt for one or all of these options simultaneously, depending on what you can afford.

SEE ALSO:
Not just for OTT, people rely on digital to discover & engage with content across TV and movies: BCG-Meta Report
Removal of commission caps for insurance agents likely to boost innovation, customer-centricity