scorecardDon't be in a hurry to prepay but plan EMIs better, say experts as home loan burden set to rise
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Don't be in a hurry to prepay but plan EMIs better, say experts as home loan burden set to rise

  • Home loan borrowers would most likely end up paying higher EMIs as a further tenure extension may not be possible.
  • EMI for a 20-year home loan of ₹70 lakh is set to go up by ₹1,138.
  • Home loan borrowers should plan in a structured manner so that their finances are not stretched, say experts.
While the budget did not bring much cheer to home loan borrowers, Wednesday’s 25 basis-point rate hike by the RBI will only add to their woes.

When RBI raises interest rates, lending institutions also increase their interest rates and home loans get costlier for borrowers. However, the impact will be most felt by those who already have a home loan.

Says Ram Raheja, managing director at S Raheja Realty, a real estate developer, “The policy rate was raised by the RBI by 25 basis points to 6.5%, we believe that this will be followed by a protracted period of waiting and watching. Most banks have already hiked house loan rates by about 200 basis points on borrowers as of this writing. The effects of the higher policy rates would be felt most quickly by current home loan borrowers.”

What it means for you: “Repo rate is directly linked to loan rates offered by lenders so an increase in the repo will increase the borrowing cost and vice-versa. The rate hike of 25 bps today will make EMIs expensive by approximately 2-4%. Borrowers will either have to shell out extra money to repay their loans or will have to extend the loan tenure,” says Swaminathan, executive chairman, Andromeda Sales and, a home loan aggregator.

If we take into consideration the current increase of 25 bps, the EMI for a 20-year home loan of ₹70 lakh at 9.25% was ₹64,111. But when we factor in the 25 bps rise, the interest rate becomes 9.5%, thereby increasing the EMI to ₹65,249. The borrower of such a loan will have to pay an extra amount of ₹1,138 each month.

However, in the last three quarters, the repo rate has been increased by 250 basis points. So, the EMI for a 20-year home loan taken in May 2022 of ₹70 lakh at 7% was ₹54,271. But when we factor in the 250-bps hike rate since May, the interest rate becomes 9.5%, increasing the EMI to ₹65,249. The borrower of such a loan will have to pay an extra amount of ₹10, 978 each month.

Let us take another example of a loan of ₹50 lakh with a tenure of 15 years which was taken last year before May. Then the interest rate was 7% and the EMI for such a loan was ₹44.941. Now, the EMI for the same loan would be ₹52,211. Before this rate hike the EMI was ₹51,460.

Borrowers who want to keep the EMI the same can look to increase their tenure. For the above loan, the tenure will have to be increased to 270 months from the original 180 months to keep the EMI the same. Before this rate hike, the tenure had to be 254 months to keep the EMIs the same.

However, increasing the tenure means that the borrower has to pay an additional interest of ₹40.41 lakh (as compared to a 7% interest rate) and of ₹7.18 lakh as compared to when the interest rate was 9.25%, before the current rate hike.

Explore different options and plan accordingly: However, Anuj Sharma – chief operations officer – IMGC, a mortgage guarantee company says that with the current rate hike, banks’ ability to assist is limited (as loan term extensions have already been exhausted), and the increase would eventually be passed on to borrowers, increasing the monthly payments.

Agrees Pramod Kathuria, founder & CEO, Easiloan, a digital home loan marketplace, “For the home loan, the banks have typically a tenure of up to working age of 60 years, hence increasing the tenure might be challenging given the number of hikes in the recent months. In this case, the bank can opt to increase the installment.”

“When the window to increase home loan tenures closes, it means that borrowers will not have the option to extend the repayment period for their home loans. This could put pressure on the more budget-strung borrowers' finances, especially if their income has not increased proportionately,” said Prashant Thakur, senior director and head of research at Anarock group.

Borrowers would need to check with the bank to find out what options they have. Borrowers can also try to negotiate with the banks, provided a they have a good credit history

How to manage a higher EMI outgo: Adhil Shetty, CEO, BankBazaar, a loan aggregator, says that one should rush into breaking their investments and making prepayments and instead plan accordingly.

“You can do it in different ways depending on what suits your financial situation best. For instance, a 20-year loan can be repaid in 12 years if you pre-pay 5% of the loan balance once a year. Else, you could pay an additional 5%-10% over your existing EMI every month. Or you could pay an additional 2-5 EMIs every year or an additional EMI every quarter. Any and all of this would bring down your loan burden,” says Shetty.

Above all, what matters is the timeframe in which you intend to repay the loan. For example, your intention was to repay a 20-year loan in 10 years but the rate hikes have taken your tenor to 25 years.

In this case, ensure that for the next 10 years, you pay back at least 10% of the loan through a combination of EMIs and prepayments. This will keep you on track for your goal.

What is important is that you do it in a planned and structured manner, so that your finances are not stretched but you make savings on your loan at the same time.

‘’More importantly, home loan borrowers whose EMIs have gone up significantly since last year, will have to manage their finances so that they can meet the increased EMI payments. If the borrowers are unable to make the higher payments, it can result in a bad credit score, which might lead to getting loans in future becoming even tougher,” said Atul Monga, co-founder and CEO, BASIC Home Loan, an automated home loan platform.

High home loan rates should not be a deterrent to home purchase:

“The magnitude of the increase in the current is 25 basis points which is less compared to previous hikes, this could potentially mean that RBI is expecting inflation with the target of 4%, post which the repo rate can be normalized. The home loan is a long-tenure loan and it is expected to go through multiple cycles of highs and lows, hence the recent hike should not deter the new home loan borrowers from purchasing,” says Kathuria.

New borrowers should instead focus on a sound repayment strategy to cope up with the changes in the increase in the interest rate.

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