Home loan interest rates have risen from 7% in May 2022 to 9.50%, leading to a substantial increase in EMIs.
Borrowers have two options: either to go for an increased EMI or keep the EMI the same and increase the loan tenure.
Let us see how the two choices impact the total interest payment over the loan period.
Scenario 1
Loan Amount: ₹ 50,00,000/-
Repayment Period: 15 Years
EMI: ₹ 44,941/-
The impact of different tenures and the extra interest burden that customers will have to bear:
If you can increase your EMI (from ₹ 44,941/- to ₹ 52,211/-) and repay the loan as per the original tenure of 180 months, your total interest payment will increase by about ₹ 13 lakh (from 30.89 lakh to 43.98 lakh)
However, if you can't afford to increase the EMI and want to pay the same EMI while lengthening the tenure, your total interest payment will more than double. You will have to repay the loan for up to 23 years, and your total interest payment will be around ₹ 70 lakhs.
Scenario 2
Loan Amount: ₹ 20,00,000/-
Repayment Period: 10 Years
EMI: ₹ 23,222/-
If you can increase your EMI (from ₹ 23,222/- to ₹ 25,880/-) and repay the loan as per the original tenure of 120 months, your total interest payment will increase by about ₹ 3 lakh (from 7.87 lakh to 11.06 lakh)
However, if you can't afford to increase the EMI and want to pay the same EMI while lengthening the tenure, your total interest payment will increase by more than ₹ 5.70 lakhs. You will have to repay the loan for up to 12 years, and your total interest payment will be around ₹ 13.59 lakhs.
How to Handle the Increase
The ideal scenario is to raise the EMI per the new interest rate. This will ensure that the loan is closed as planned, and you will bear the least amount of the extra interest payment.
However, if you can't pay the higher EMIs, you can use a few other strategies to shorten the repayment period and reduce the total interest paid.
Here are three methods for shortening the repayment period and lowering your interest payments without increasing your current EMI.
Pay an extra EMI every year.
Increase your EMI by 5% every year.
Increase your EMI by 10% every year.
These strategies depend on the fact that, while you may be unable to pay the increased EMI at this time, you can gradually increase the EMI as your income grows over time.
Let's see how these strategies help in the two scenarios mentioned above.
Impact in Scenario 1
Loan Amount: ₹ 50,00,000/- Repayment Period: 15 Years
Paying just one extra EMI every year, without raising the current EMI, will help you repay the loan in 216 months and save about ₹ 16.78 Lakh in interest payment.
If you maintain the same EMI but increase it by 5% annually, you will repay the loan in 151 months and save more than ₹ 30 lakh in interest payments.
If you maintain the same EMI but increase it by 10% every year, you will pay off the loan in 117 months and save more than half your interest payment.
Impact in Scenario 2
Loan Amount: ₹ 20,00,000/- Repayment Period: 10 Years
Paying just one extra EMI every year, without raising the current EMI, will help you repay the loan in 128 months and save about ₹ 1.88 Lakh in interest payment.
If you maintain the same EMI but increase it by 5% annually, you will repay the loan in 109 months and save about ₹ 3 lakh in interest payments.
If you maintain the same EMI but increase it by 10% every year, you will pay off the loan in 91 months and save more than ₹ 4 lakh in interest payment.
Some Additional Thoughts
Even if you can afford the higher EMI, you can use the above strategies to repay your loan faster and save money on your interest.
If you wish to take a home loan in future, please try to limit the EMI to 30% of your net monthly income. You will be better prepared to deal with the rise in interest rates.