imagine taking a 20 year old home loan And paying EMI for more than 26 years. Repo rate buzz growth RBI has increased home loan rates to 8.1% in recent months from 6.7% in April. This will go up further after home loan companies factor in the 30 September hike. borrowers Those who had taken long term loans 2-3 years back are troubled with longer tenure of 5-6 years as compared to their original terms. If the rates don’t come down, a 20-year home loan borrower at 6.7% in 2019 will have to pay around 62 additional EMIs.

Analysts expect things to get worse before they get better. With inflation showing no signs of easing, the RBI may hike rates by another 35 basis points in December and by 25 basis points by March 2023. If this happens, home loan rates are likely to rise above 9% by April 2023.

The hike in home loan rates will have a greater impact on new borrowers. as long as remaining tenure The effect of debt is greater because interest It accounts for a major part of the EMI in the initial years and comes down progressively. Even after the first year, about 80% of the EMI is of interest. But in the 19th year, the interest share in the EMI is less than 10%. Hence, people with old loans taken 10-15 years back will not extend their loan tenure as much as those with new loans taken 2-3 years back.


What can borrowers do?

When rates rise, extending the tenure of the floating rate loan is the default response of the lenders. But this is not possible if the tenure extends beyond the working years of the borrower. The borrower then has two options: either increase the EMI or pay a lump sum amount to reduce the tenure. In the example given in the graphic, to maintain the home loan tenure at 16 years and six months, the borrower has to either increase the EMI from Rs 5,177 to Rs 43,046 or pay a lump sum of Rs 5.5 lakh. Reduce the outstanding principal.

Experts say that paying off the home loan early can be the best way to channelize the surplus money right now. Stock markets are looking restless, fixed deposits are not taxable and debt funds are giving poor returns. “If ‘money saved is money earned’, it may be best to prepay a home loan Investment The option is available,” says Raj Khosla, Managing Director, MyMoneyMantra.com. In fact, no other investment avenue can deliver better returns than an assured savings of 8.5-9% interest on a home loan. It is also a good idea to increase the EMI every year in line with the increase in income. This can have a dramatic effect on the loan term. If you take a home loan of Rs 50 lakh @ 8.5% for 20 years, the EMI will be Rs 43,391. But with a 5% increase in EMI every year, the loan will be wiped out in a little more than 12 years. If you tighten your belt a bit and increase the EMI by 10% every year, you can become debt free in less than 10 years.