How Rate Hikes by the RBI Have Impacted Your Home Loan? Know Here...

A home loan is an unavoidable long-term financial commitment for a common man. The payment of home loan EMIs is typically spread over a long period of 15 to 30 years. Since May 2022, the RBI has been increasing the Repo Rate to control inflation and stimulate economic growth. This increase has resulted in increased home loan interest rates, which is affecting the home loan EMIs of the borrowers.

A Repo, short for 'Repurchase Option' or 'Repurchase Agreement', is the rate of interest at which commercial banks borrow money from the central bank -- the RBI. The RBI employs the Repo Rate as a tool to control inflation in the country. When inflation affects the market, the RBI raises the repo rate. As the high repo rate makes it difficult for banks to borrow money from the central bank, it decreases the money supply in the market, which ultimately helps to counteract inflation. However, the increase in the banks' borrowing costs results in increased interest rates of retail loans with variable interest rates.

In contrast to countries like the United States, where most people prefer fixed interest rates that remain the same throughout the loan tenure, a majority of home loan borrowers in India choose variable interest rates, which can fluctuate based on changes in the monetary policy. When interest rates go down, borrowers with variable interest rate loans can benefit from lower EMIs, making it easier for them to repay their loans. Nevertheless, this also means that they may end up paying a higher interest rate in the long term if interest rates increase again in the future.

With an increase in the home loan interest rates, the EMI amount also increases. The increased monthly repayments can put an unmanageable financial burden on the borrower. To reduce this burden, borrowers can choose to increase their home loan tenure. Extending the loan tenure reduces their monthly repayment amount and makes it easier for them to manage their finances.

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Many banks in India have a practice of automatically increasing the loan tenures as interest rates rise, and borrowers are often not informed about this decision. However, the increased loan tenure puts a long-term EMI burden on the borrowers, and they may end up paying even after their retirement.

Let's take the example of my friend Shrishti who stays in Bangalore. Shrishti and her husband, Aarav, took a home loan of Rs 80 lakhs in April 2021 at an interest rate of 6.65% p.a. Shrishti and Aarav, at the time of taking the loan, were 30 and 32, respectively. Since they could afford a home loan EMI of Rs 60,354 and had the plan to get retired by the age of 50, they opted for a 20 years loan tenure.

Here's a tabular representation for better understanding:

Shrishti and Aarav have already paid Rs 10,38,471 towards the interest charges and Rs 4,10,035 towards the principal amount in the last two years. Hence, the closing balance of their home loan is Rs 75,89,964. Considering the latest hike in the interest rate, their home loan looks like this:

Since Shrishti and Aarav have other EMIs & high fixed expenses and couldn't afford to pay the increased EMI, they had no option but to extend their loan tenure. Hence, this month, Shrishti and Aarav got their loan tenure extended to 30 years and are now paying a home loan EMI of Rs 59,169. This is what their current home loan structure looks like:

While extending the loan tenure has helped reduce the monthly financial burden, Shrishti and Aarav had to continue working for 10 more years than they had initially planned. They feel they are trapped in this loan repayment cycle that seems never-ending!

Despite the predictions of many economists that the RBI may have stopped increasing the Repo Rates for this tightening cycle, the past hikes have still caused great distress for millions of borrowers. If you, too, are struggling with out-of-budget EMI, extended loan tenure, or both, here's how you can reduce your home loan burden:

1. Try to repay as much as possible:

If your budget allows, making larger payments than the required EMI amount will help you reduce the principal amount and the overall interest paid over the loan tenure. So, if your home loan interest rate has increased, it is always advisable to prepay your loan or at least stick to the original loan tenure as far as possible. You can make lumpsum payments towards the principal amount using extra funds, such as bonuses, tax rebates, income from additional sources, etc. Many banks allow borrowers to make prepayments without any penalty or charge up to a certain limit.

2. Extend the home loan tenure:

Extending the home loan tenure can be helpful for borrowers in a rising interest rate scenario, as it can help them manage their monthly repayments. However, it is important to note that extending the loan tenure may also result in a higher overall interest paid over the loan tenure, as you have to pay interest for the extended loan tenure. Hence, increasing the loan tenure should be your last option when your budget does not allow you to make larger repayments.

3. Consider home loan transfer:

A home loan balance transfer can be a helpful option for borrowers to reduce their total interest outgo in a rising interest rate scenario. It is a process of transferring the outstanding balance of a home loan from one lender to another, who offers a lower interest rate or better loan terms. However, take note that a home loan transfer may involve processing fee and other charges, which can add to the overall cost of the loan. Therefore, borrowers should carefully evaluate the cost and benefits of a home loan transfer and choose the option that best fits their financial situation and goals.

4. Negotiate with your lender:

Negotiating with the lender can be a helpful option for borrowers in a rising interest rate scenario. It can lead to a reduction in the interest rate or better loan terms, thereby reducing the overall interest burden and managing the monthly repayments. You can negotiate with your lender by presenting a case for a reduction in the interest rate or better loan terms based on your creditworthiness, repayment history, and relationship with the lender. However, take note that negotiating with the lender may not always result in your favour, as it depends on the lender's policies and the borrower's creditworthiness. Hence, borrowers should be prepared to present a strong case and have a backup plan in case the negotiation does not yield the desired results.

To conclude:

Increasing interest rates have created a long-term financial burden on home loan borrowers, particularly those with variable interest rates. To manage your home loan burden, you can employ various strategies, such as repaying as much as possible, opting for a home loan balance transfer, and negotiating with the lender to reduce the interest rate. By taking proactive measures to manage your home loan burden, you can avoid the stress and financial strain associated with rising interest rates and continue to enjoy the benefits of homeownership.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.