How To Lighten Your Home Loan Load

Part pre-payment, increasing EMI/ tenure or switching lenders… which is your best bet in a rising interest rate scenario?

After a downward spiral of four-and-a-half years, the Reserve Bank of India increased the repo rate—the rate at which banks borrow—last month by 25 basis points (bps) or 0.25 percent. The banks were quick to react with an increase of 5-10 bps in their marginal cost-based lending rate (MCLR). Some leading lenders had anticipated the hike well in advance and raised their rates prior to the RBI move. Unfortunately, this may not be the end of the interest rate hike. Given the rising inflation and international crude oil prices hovering stubbornly at a high level along with the government hiking the minimum support price for many crops, retail inflation is likely to remain elevated, which may result in interest rates going further up in the coming months. And though a 25 bps hike may seem minor, it has a major impact on your loan repayment, especially long-term ones like a home loan.

IMPACT OF AN INTEREST RATE RISE

Typically, when lenders increase interest rates, they prefer to increase the loan tenure of the borrower instead of the equated monthly instalment. Though the borrower is relieved that he doesn’t have to alter his monthly budget to meet the increase in EMI, lengthening the tenure actually hurts his finances because of the increase in overall interest payment. “If the interest on a Rs 50 lakh home loan for 300 months increases from 8.5% to 8.75% in the 12th month, your balance loan tenure gets extended by 10 months. You end up effectively paying an additional interest of Rs 8.73 lakh (Rs 79.51 lakh instead of the original Rs 70.78 lakh),” says Vipul Patel, managing director & founder of independent loan advisory, Mortgage World.

INCREASE EMI OR TENURE?