Home loan tenures jump to over 50 years on rate hikes

The interest on floating-rate home loans has risen in tandem with the increase in repo rate over the last 18 months. Since October 2019, all retail loans have been linked to an external benchmark, with repo rate being the most common benchmark used by lenders, and interest rates on such loans move up and down as per the benchmark. So, as the RBI cumulatively hiked the repo rate by 225 basis points (bps) since May 2022, banks have been quick to pass on these increased rates to home loan borrowers. One basis point is one-hundredth of a percentage point.

Currently, the interest rate on Korukonda’s home loan is 9%. He had taken the loan in 2019 when the rate was just 7.25%.

In Bangalore, Albert Arul Prakash Rajendran, 42, says that even after paying back nearly ₹14 lakh of his outstanding loan amount in the last two years, he is back to square one with the increased interest rate. “My loan term is back to the original duration of 15 years," he says. Rajendran’s home loan was sanctioned at 6.5% in 2021 and the current interest rate on it is 9%.

Korukonda and Rajendran’s cases are not isolated. Most home loan borrowers are feeling the sting of increased loan rates on their finances either in the form of inflated EMIs or longer tenures, which can impact their other long-term financial goals.

A significant increase in interest also offsets the benefit that leverage, which is the loan, provides in boosting investment on a property. Korukonda is a case in point. When he took the ₹2.2 crore loan, the total amount payable (principal and interest) was ₹4 crore. At the current rate of 9%, it’s about ₹6.3 crore. “It’s almost as if the principal has been added to the total amount again," he says.

 

When banks revise the interest rates in line with the hike in key policy rates, the default option that they exercise is an increase in the loan tenure. The EMI amount is increased either on the borrower’s request or when the EMI fails to cover the interest portion. “The interest is calculated by multiplying the outstanding amount with the interest rate and then dividing it by 12. The monthly EMIs first covers this interest portion and then the principal. In times of rising interest rates, as long as the EMI is able to cover the interest, banks keep increasing the tenure and leave the EMI unchanged. But, when the EMI falls short of servicing the interest, the bank will increase the instalment amount also," says Nishant Batra, chief goal planner, Holistic Prime Wealth, and a mutual fund distributor.

The increased rates have mainly affected those who took a loan in the past two years. This is because, one, loans were sanctioned at dirt cheap rates of 6.5-6.8% during this period and a jump of 200-300 bps now seems unfair. And two, the interest component is higher in the initial years of the loan term.

Take the case of Ravi Kumar, a Hyderabad-based IT professional. Kumar took a home loan in March 2022 at 6.5% interest rate and a term of 20 years. Just one year later, the revised interest rate stands at 9% and the loan tenure is 54 years. “I couldn’t believe my eyes when I saw the revised loan term in my bank’s mobile app. At first I thought it was an error," says 32-year-old Kumar.

Higher EMIs or longer loan terms?

Home loan borrowers have some options that can mitigate the impact of increased interest rates. Experts say they should opt for a higher EMI amount rather than a lengthier tenure as the latter implies a higher interest outgo. To explain with an example, a loan of ₹60 lakh at 8% interest and 20 years term will demand total interest outgo of ₹60.44 lakh. If the tenure is increased to 25 years, the total interest jumps to nearly ₹79 lakh, whereas if it is reduced by five years to 15 years, the interest outgo is ₹43.2 lakh.

However, be careful to not direct your entire disposable income into the EMIs. Experts say that EMIs should not take up more than 50-60% of your total monthly savings. Also, if the remaining tenure of your loan is less than 20-30% of the full term, you can skip increasing the EMI if your budget does not permit it—the interest portion in the outstanding balance by now will hardly be 20%.

The other option is to make prepayments. “One can withdraw money from employee provident fund (EPF) or public provident fund (PPF) to make part-payments. Bringing down the principal at the outset will reduce the interest and contain the surge in EMIs," says Batra.

Salaried individuals can withdraw from their EPF to make payments towards home loan after 10 years of membership. In the case of PPF, withdrawal up to 50% of the amount is allowed after seven years, beginning with the end of the year since the first contribution is made.

Ninganagouda B, 36, has made five part-payments totalling ₹10.5 lakh in the last six years. This, along with a gradual increase in his EMI amount made possible due to salary hikes, has helped Ninganagouda bring down his home loan term from 29.6 years to just 10 years.

Similarly, Rajendran puts in an additional ₹5,000-10,000 every month towards principal repayment. Take note that only public banks allow you to make monthly prepayments without a cap. Some private banks ask for a minimum of two months‘ EMIs for a prepayment, which means you have to shell out a lump sum. Because of this flexibility, Rajendran is not keen on transferring his loan to another bank that can offer him a lower rate. Some private banks may even charge a processing fee for part payments.

Apart from structuring your EMIs and tenure smartly, you can also negotiate a lower rate with the lender. This will particularly benefit those with a good credit score. Kumar got his interest rate reduced by 55 bps but this came at a cost of ₹2,950. To be sure, most private banks charge a one-time fee for reducing the interest rate.

Another way to shop for a lower rate is by transferring your loan to another lender. However, this entails several upfront costs, including processing fee and memorandum of deposit (MOD), and the process of transferring the loan includes almost all checks that the borrower undergoes when getting a new loan. It is advisable to calculate the upfront costs to get an idea of net savings on your loan.