As home loan rates continue to rise and are expected to rise further, most homebuyers are now struggling with high equated monthly instalments (EMIs).
Within hours of the Reserve Bank of India (RBI) hiking its repo rate by 50 basis points (bps) on September 30, 2022, several banks, including ICICI Bank and Axis Bank, as well as non-banking housing finance companies, such as HDFC Ltd and LIC Housing Finance, increased their home loan rates by almost the same proportion, effective from October 1, 2022.
HDFC hiked its home loan rate by 50 bps. In total, HDFC has implemented seven rate hikes in the last five months. LIC Housing Finance has also increased the LIC Housing Prime Lending Rate (LHPLR), the benchmark rate to which all its loans are linked, by 50 bps.
Considering a hike of 190 basis points in less than six months, it is a given that the EMIs have gone up. You do get the option not to increase the EMI, but in that case, the loan tenure gets extended. Suppose a Rs 30 lakh loan at 6.8 per cent per annum is taken for 15 years (180 months). If the home loan interest rate becomes 8.4 per cent per annum and the EMI remains the same, the tenure increases from 180 months to 223 months.
However, it’s not advisable to increase the loan tenure. If you do so, your overall interest payout increases and you remain in debt for a longer time. “It’s an ideal situation if a surplus can be generated and EMI can be increased by a suitable amount. If managing to allocate extra money towards ongoing EMI looks tough, one can target to increase EMI by a certain percentage routinely every year so as to cope up with the burden of interest payments,” says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm.
Here are some strategies by which you could cope with high home loan EMIs without increasing the tenure.
Relook At Your Budget
It’s always possible to squeeze your budget a little if you look at all the expense heads. Explains Sen: “The process to increase EMI starts with budgeting and cash flow planning. Family’s spending pattern will have to be looked into.”
Prepay The Loan
A salaried person can utilise the annual or performance bonus to prepay the loan. This will help him/her to reduce the load of interest payments.
“Prepaying five per cent of the loan balance once a year pays off a 20-year loan in 12 years. Voluntarily hiking EMIs act as a micro prepayment. If you prepay one extra EMI every year, your loan closes in 204 months (17 years). If you increase your EMI by five per cent every year, the loan will close in 151 months (12 years and 7 months). If you increase your EMI by 10 per cent every year, you will be able to close your loan in 119 months (9 years and 11 months),” says Adhil Shetty, CEO, and founder, BankBazaar.com, a financial services website.
Adds Raj Khosla, founder and managing director of MyMoneyMantra.com, a loan aggregator: “Customers should make partial payment against their loan accounts, if possible, as the interest is charged on the outstanding amount. This can help the customer in maintaining the same EMI rate over the rest of the loan duration.”
Make Bullet Repayments
You can also make bullet repayments. “For instance, 17-times your current EMI will wipe off the impact of the rate hikes on a loan with 20 years outstanding. Regardless of whether you repay slowly or fast, prepayment is your only option to mitigate the impact of rate hikes,” says Shetty.
Refinance Your Loan
You could always transfer your home loan to a lender with lower interest rates. Before opting for this, you must research and compare interest rates among various lenders. You would also need to pay a nominal conversion fee to your existing bank or lender. It’s important to keep these transaction costs in mind before refinancing your home loan.
Negotiate With Your Bank
If you have a long-term and good relationship with your bank, have a good credit history and you have been paying your EMIs on time, you could try negotiating for lower interest rates.