This is because the Reserve Bank recently announced a 50 basis point (bps) repo rate hike to curb inflation. Following this, the repo rate has returned to pre-contagion 5.40%. This is the third rate hike this fiscal year. The repo rate hike from May to August is 140 basis points. Home loans and other retail loans linked to repo rates will accelerate policy rate hikes, said Naveen Gukreja, CEO of Baisabazar.
What should borrowers do?
Banks usually tend to extend the loan tenure when interest rates rise, in return for increasing the Equated Monthly Installment (EMI). You can increase the EMI or allow the bank to extend the loan tenure. But opting for a tenure extension can lead to higher interest costs than higher EMIs, says Gukreja. For example, if you have taken a home loan of Rs 50 lakh at 7.55% interest per annum with a tenure of 25 years, the EMI will be Rs 37,112. After the 50 bps increase, the revised rate will be 8.05%. If you don’t choose to extend the loan tenure, the EMI goes up to Rs.38,757.
Rs.1,645 per month will be payable more. Cumulative increase in interest burden over 25 years would be Rs 4.93 lakh. If the bank decides to extend the loan tenure while keeping the EMI intact, the repayment period will increase to more than 50 months. The additional interest payment would be close to Rs.18.57 lakhs.
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Prepay to save interest..
If you take a home loan of Rs 50 lakh at 8.05% over 25 years, the EMI will be Rs 38,757. If you continue to pay your regular EMIs without prepaying, you will end up paying a total of Rs 66.27 lakhs over 25 years. To avoid such heavy interest, many people make prepayments when they have as much money as possible. Experts suggest rethinking your loan repayment strategy and considering prepayment to save on increased interest.
For a home loan of Rs 50 lakh with a tenure of 25 years and an interest rate of 8.05 %, the monthly EMI is Rs 38,757. Here are the strategies if you want to reduce your home loan burden….
Increase EMIs annually…
Consider increasing your home loan EMI amounts every year if your salary increases annually. Try to increase your EMIs by at least 5 percent every year. Doing so will pay off your 25-year home loan in just 14 years. Interest cost will also be very low. If you increase your EMI amount by 10% annually, the loan will be completed in 11 years. Rs. You will pay only 31.37 lakhs as interest. This results in a total savings of Rs.35 lakhs while paying interest.
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10% additional EMI every month…
10% of your regular monthly EMI of Rs.38,757 for more savings i.e. Rs. 3,875 plus an additional payment will help you save Rs.18 lakh in interest payments and clear your loan within 20 years.
Total amount in advance..
A higher down payment will naturally reduce the overall interest payable by a substantial amount. If you prepay as much as Rs 1 lakh every year, you can reduce the interest to Rs 27 lakh and clear the loan in the 16th year.
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An additional EMI every year..
The extra amount you can pay in monthly EMIs per year (a small lump sum) will reduce your interest by up to Rs 16 lakh and 5 years on the loan tenure. You can choose any of the above strategies to reduce your debt burden and pay off your loan early.
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