Home Loan EMIs Set To Go Up: Should You Go For A Higher EMI or Higher Tenure?

If you are an existing home loan borrower, the equated monthly instalments (EMIs) on your home loan are set to increase. How much your outgo will increase will depend on the quantum of increase. With interest rates set to rise further in the future, it’s always better to assess how much your EMI will go up to ensure you are prepared to manage your cash flows efficiently.

Recent Rate Hikes

HDFC Ltd has increased its retail prime lending rate (RPLR) on housing loans by 30 bps, effective May 9, 2022. One basis point is equal to 0.01 per cent. This increase is applicable to both new and existing borrowers. As per the lender’s statement, interest rates from May 9 will be in the range of 7-7.45 per cent.

India’s largest bank State Bank of India (SBI) has hiked its marginal cost of funds-based lending rate (MCLR) by 10 bps across tenures, effective May 15. As per the SBI website, the overnight, one-month and three-month MCLR rates have been raised to 6.85 per cent each. The six-month MCLR rates have been raised to 7.15 per cent.

How Much Will Your EMIs Increase?

According to back-of-the-envelope calculations, an increase of 50 basis points (bps) or 0.5 per cent can take up your loan EMIs by around 4 per cent, while a 1 percentage point increase will force you to shell out around 8 per cent higher, provided you decide to stick to the original tenure. For instance, for a Rs 30 lakh loan over a tenure of 20 years, the EMI will go up by nearly 4 per cent or about Rs 1,000 if the rate goes up by 50 basis points (see graph).

Higher EMIs Vs Higher Tenure

Increasing rates mean that your overall interest burden is set to go up and you will need to compensate for this rise. However, the interest burden will be higher in case you settle for raising the tenure instead of the EMIs.

One way to do it would be by raising the EMI so that your tenor remains the same. For instance, in case of a Rs 50 lakh loan at 7 per cent, if the interest goes up by 40 bps, then you would need to pay approximately Rs 1,200 in addition to your current EMI amount to ensure that the loan is closed in 20 years (assuming the interest remains 7.4 per cent for the rest of the tenor).

If you repay at the same EMI, you will require 18 additional months to close your loan. The additional interest outflow in the latter case would be approximately Rs 7 lakh compared with approximately Rs 3 lakh  in the former case. So a higher EMI does help you save significantly.

“If you are unable to opt for a higher EMI, then you should make plans for regular prepayments. This is only the first hike and the global situation indicates that we may see an increase of 200 bps in the interest rates over the next year or so. So retaining your current EMI without making prepayments could end up extending your tenor by a decade or more and doubling the cost of your loan. So it is essential you have a prepayment plan in place,” says Adhil Shetty, CEO of Bankbazaar.com, a financial services website.