It’s been a crazy year with home loans. As the RBI pumped the repo rate up from 4.0 to 6.5, home loans became costlier at a pace not seen in years.
Consider someone who may have borrowed at the rock bottom rate of 6.50 last year. With a 2.5 percentage points increase taking their rate to 9.00, their per-lakh EMI on a 20-year loan would rise from ₹746 to ₹900 – a 20% leap within a year.
Those who had opted for tenor extension instead of EMI adjustment would have seen their loan tenor enter crazy territory. In the above example, assuming a constant EMI, a 240-month loan can become a 1000-month one. So crazy is the compounding of interest that this loan cannot be theoretically repaid in one’s lifetime.
To counter the craziness, home loan tenors get capped at the borrower’s retirement age—typically 60 or 65 years. But to accommodate this cap for borrowers nearing retirement, both the tenor and the EMI must be hiked.
The RBI pausing the repo rate at 6.5 this week comes as relief. But the rates remain elevated. The loan tenors still need to be pulled back from crazy territory to something resembling normalcy.
A friend tells me their 240-month loan taken three years ago is now at 345 months. Another tells me their 250-month loan is at 410 months. Social media has people sharing their loan tenors extending into their 70s and 80s. Surely, there’s a way to counter this craziness.
My EMI Hike
Last year, I refinanced my home loan from a large NBFC to a large private bank. The repo rate benchmarking was one of the things I wanted. But I had the misfortune of timing my move with RBI’s rate hikes.
I took my refinanced loan for 15 years at 6.95. A few months later, my rate was 9.05. There are many ways to make short work of your home loan. A refinance is one of them. I’d already done that, and it hasn’t helped yet.
The second thing to do was prepayment. Apart from my EMIs, I had pre-paid around 10% of the loan this year. The loan that started with 180 months left had somehow ballooned to 192 months despite nine EMIs and the pre-payment.
The third thing to do now was a voluntary EMI hike. I called my bank to raise my EMI by around 11%. The bank confirmed that this reduces my tenor to 155. Once the repo rate recedes, the tenor will fall some more on its own.
Why EMI Hikes
If you can manage it, voluntary EMI hikes are a powerful way to control your home loan tenor. The amount you pay over and above the regular EMI is treated as a mini prepayment.
For example, if your regular EMI is ₹50,000 but you voluntarily step it up to ₹55,000, the additional ₹5000 is adjusted against the loan principal.
Pre-payments are normally difficult because you need to pay a minimum of one EMI, or sometimes two. It isn’t always possible to have that kind of surplus cash lying around.
But an EMI hike is an achievable hack that provides the same effect as the lump-sum pre-payment in reducing the loan tenor.
Lenders will allow you to voluntarily increase your EMI. An email or a phone call would get it down. How much is up to you. Ideally, income increments should help you systematically step up your EMIs with time. The more you pay, the faster you get out of debt.
There would be those who’d argue that investing is better than prepayment or EMI hikes. The fact is the average retail borrower prefers to be debt-free. Putting the stress of EMIs behind them is something most people look forward to.
As loan tenors balloon to absurd proportions, it’s important to remember the intended time frame in which you want to get out of debt. If you plan to pay off your loan in 10 years but your tenor has gone to 20, ensure you do all you can – refinance, pre-pay, or EMI hike – to pull the tenor back to 10.
The pain of inflation is intense now. But if you work on it now, the coming years would be much easier on your wallet.
AR Hemant is AVP, Head of Communications at BankBazaar.
