Home / Money / Personal Finance /  Home loan rates are on the rise. What are the strategies to lower EMI burden?

On December 7, 2022, the Reserve Bank of India (RBI) increased the repo rate by 35 basis points. Since May, the repo rate has increased five times in a row, bringing the total hike to 225 bps. The Repo rate jumped from 4.0% in May 2022 to 6.25% in December 2022, which caused banks to raise their lending rates. As a consequence, borrowers are the ones who are most negatively harmed by the central bank's consecutive major lending rate hikes due to inflationary pressure, hence the EMI burden has skyrocketed for borrowers amid rising interest rates. What should borrowers do in such a situation, or what tactics should they utilise to lessen their EMI burden, let's find out from our industry experts, who have conducted a meeting with us and participated to share some strategies for the borrowers adversely impacted by rising lending rates.

CA Manish P. Hingar Founder at Fintoo said the repo rate has increased from 4.0% in May 2022, to 6.25% in December 2022 which has resulted in banks increasing their lending rates. When banks and financial institutions increase their lending rates not only do the new loans become expensive, but the existing loans also become expensive with the increase in interest rates, and increasing EMI costs. This can have a significant impact on an individual’s monthly budget. Let’s understand this with the help of a simple example.

“Suppose, you have taken a home loan of 50 Lakhs of 20 years tenor at 7% interest p.a., your monthly EMI will be 38,765 and you will be paying a total interest of 43,03,587. Now assume with the rise in repo rates your bank increased the interest rate to 8.5% p.a. from your existing interest rate of 7% p.a. If you keep the tenor of the loan same, your monthly EMI will increase to 43,391 and total interest cost to 54,13,897. But, if you wish to keep the amount of your monthly EMI the same as 38,765, then the 20 years loan tenor will be increased to 28.9 years resulting in an increased total interest cost to 84,50,166," said Manish P. Hingar.

Manish P. Hingar said “So, are there any ways or strategies which can help an individual to save on interest costs and repay loans earlier? The answer is a big yes. Following are the three strategies that can help an individual to save on interest costs and repay loans faster.

1. Consider paying one additional EMI every year

Take the example of the above situation of 50 Lakhs loan of 20 years tenor at 8.5% interest p.a., and EMI of 43,391. If you pay one additional EMI every year you will save up to 10.2 Lakhs on interest cost and additionally the tenor of the loan will be reduced by approximately 3.3 years.

2. Consider increasing your EMIs by 5% every year

Keeping the same situation, with the annual increment in your annual salary, consider hiking up your monthly EMI by at least 5% every year. This will help you to save up to 19.5 Lakhs on interest cost and reduce your loan tenor by approximately 7.5 years.

3. Consider using your annual bonus or incentives to repay loans

Now, consider using your annual incentives or bonuses to make one lump sum additional payment towards the repayment of your loan. With 1 Lakh additional annual repayment, you will save up to 18.5 Lakhs on interest cost and your loan tenor will be reduced by approximately 6 years."

Zubin Daboo,Head of Marketing, Epsilon Money Mart said “As we know, in case of home loan the majority of portion goes towards interest payment. Increasing interest rate is not, therefore, great news for borrowers. In order to mitigate this one can opt for longer duration loan to reduce the EMI amount. Any surplus/bonus income received should ideally be diverted to further reduce your loan outstanding balance. In this case do not change the EMI amount but reduce the tenure. There are various ways, but one needs to decide wisely according to the suitability to their pockets and after checking with the financial advisor."

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

Vipul Das
Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for Goodreturns.in (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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