Home Loan Tenures Surge On Rising Interest Rates: What Should You Do?

A survey of the Federation of Indian Chambers of Commerce and Industry (FICCI) said the average interest rates rose to 9.4 per cent, while the highest borrowing cost was pegged at 15 per cent, underscoring the record rise in home loan rates.  

As the Reserve Bank of India (RBI) continues to hike the repo rate, borrowing costs have skyrocketed, and people who opted for floating rates are the worst hit, as they face extended loan tenure or higher equated monthly installments (EMIs).  

“I am feeling the pinch clearly, as I have to pay EMI for my apartment at Bandra-Kurla Complex. The principal amount of home loan has increased and the loan tenure rose by five years, which means I would have to pay the loan until I am 65,” says Archana Mathur, 45, a Mumbai resident.  

Increase In EMI  

Experts say home loan owners are now caught up between a rock and a hard place. In the past one year alone, the interest on borrowings went up by 250 basis points. To offset this hike, banks have either increased their EMI or the loan tenure. Both options would increase the total interest during the loan tenure.

Earlier, “A 20-year loan of Rs 60 lakh, with a 6.5 per cent interest rate, the EMI was about Rs 45,000. Now, with a nine per cent interest rate, the EMI increased to Rs 54,000. One would now pay nearly 50 per cent (Rs 70 lakh instead of Rs 47 lakh) more toward interest payment over this loan tenure,” says Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm.  

“The alternative is worse as to keep the EMI constant by increasing the loan tenure to 30 years one would pay nearly 140 per cent (Rs 1.14 crore instead of Rs 47 lakh) more towards interest payment,” adds Kumar.  

“Most of the home loan borrowers are feeling the pinch of inflated EMIs or longer tenures, which would eventually impact their other long-term financial goals,” says AK Narayanan, CEO, AK Narayan Associates, a financial planning firm.  

Let’s take for example a home loan of Rs 60 lakh taken in August 2022 at seven per cent interest rate.

Normally, the scheme of your loan will look as follows, post- rate increase.  

Now, let's look at the impact of changes in tenure with a fixed EMI.

Source: Raj Khosla, founder and managing director of MyMoneyMantra.com.

You can clearly see from the example above that there will be an increase of 130 months resulting in a mammoth increase in interest for a Rs 60 lakh loan.

What Can Consumers Do To offset the Pressure Of Increased Interest Rates:  

Consider Making A Partial Payment: Partial prepayment is a great way for you to reduce the interest amount on your home loan. Say, you got an annual bonus or one of your fixed deposits (FDs) matured, why not use it to partially pay your loan and reduce the outstanding amount? After making the partial payment of Rs 10 lakh, the outstanding principal would be reduced to Rs 50 lakh.

There are two ways to proceed from here:

Keep The EMI Constant: If the borrower chooses to keep the EMI constant, the tenure of the loan would be reduced. The new tenure can be calculated using a loan tenure calculator. Using this method, the new tenure would be approximately 17 years and three months, and the borrower would save approximately Rs 20 lakh in interest payments over the life of the loan.

Keep The Tenure Constant: If the borrower chooses to keep the tenure constant at 20 years, the EMI would be reduced. The new EMI can be calculated using a loan amortization calculator. Using this method, the new EMI would be around Rs 43,867 and the borrower would save approximately Rs 11 lakh in interest payments over the life of the loan.

These calculations are rough estimates and actual savings may vary depending on the terms of the loan and the calculation method used. Additionally, the borrower may want to confirm with their lender whether there are any prepayment penalties or other fees associated with making a partial payment.

Consider Paying One Extra EMI Per Year: “Paying a single EMI extra can help you a lot in reducing your overall interest burden. If the borrower decides to pay one extra EMI per year, the total interest payable would reduce to Rs 56,45,678 (220 EMIs). The loan tenure would also be reduced to 18 years and 4 months,” adds Khosla.  

Conclusion

So, you can offset the increase in lending rates with a bit of financial planning assuming you have made some smart investments in the past that can be instrumental in reducing the burden of increased lending rates in the longer run.